How do I demonstrate page overlaps when exporting to pdf?

One more thing, my smaller page master, is there any way to set the alignment to the rest of the book? I need it to be bottom aligned, which I need to do manually for each page when i insert it using the page tool. Is there any way to automate this?

Have you talked to the printer about this? The position of the different sized pages would be handled in the bindery. The printer might prefer two different documents especially if you are spec'ing different papers. Even printing on the same sheet the two sizes would have to be printed on separate signatures then trimmed and combined at the bindery.

You can place InDesign pages in another document the same way you can place an image. So for dummying you could make a new document with the same trim size as the large pages and place the large and small pages on the same page. Something like this where I created separate large and small docs, but you could do the same with a combined doc with different sized pages:

At the left is the dummy where I've placed the 6-7 pages twice on spreads and then placed the small book's page 1 on top of the first spread's page 7, and then page 2 on top of the second spread's page 6. Once you've set up the dummy book all you would have to do is update the links if you make changes to the actual layouts and export the dummy spreads for the client.

I don't think you can do with in a PDF by itself. PDF is not designed for this.

To really give your client a good idea of the final appearance, you need to print out the PDF, trim the pages as necessary, and create a "dummy" sample of the book (as you've shown in the image). It would have a three-dimensional appearance which would resemble the final product.