My 2003 S430 has aftermarket headlamps, with xenon projector low beams in 2 and H7 halogen high beams in 7. A friend has a 2002 S430 with the same set-up in stock headlamps.

Xenons take a few seconds to come to full brightness, so they don't turn off/on for high beams. The bi-xenons stay on for both.

 

Here's an old video that I made that explains how the bixenon projector works.

Whereas a dual filament halogen bulb uses two different filaments to generate a lowbeam and highbeam functionality. A bixenon projector has a solenoid/motor that is attached to the cutoff shield. When the 'highbeams' are activated a signal is sent to the solenoid and the motor will lower the cutoff plate allowing more light to shine above the cutoff; hence highbeams.


Hope this helps

 

I will answer my questions with information I have found so far.

1. For halogen headlamps the compartment (2) and (7) both contain H7 halogen bulbs.

Correct!

2. For xenon headlamps the compartment (2) would contain D2S xenon bulb, but compartment (7) would still be halogen?

Correct!

3. What about bi-xenon? In bi-xenon headlamps the compartment (2) would contain D2S xenon bulb which would be used for both low and high beam? What about compartment (7)? Would it be empty?

Yes, compartment (2) is D2S xenon bulb which is used for both low and high beams. Compartment (7) will not be empty. It will contain H7 halogen bulb and will function as normal high beam supporting D2S bulb in compartment (2).

Is there a reason why operator's manual is not considering "plain xenon", but mentions only bi-xenon?

Seems that non-bi-xenon xenon headlamps are aftermarket products therefore not covered in MB operator's manual.