I was wondering if I could buy a Pervasive 10-20 user license for the client server PSQL Ver 10 database and use it to increase my user count for Pervasive which is being used as the database engine for another application? (The application vendor charges 8 x more for the user count increase than it costs to buy the Pervasive 10-20 user license directly)

From a Pervasive perspective, it'll be fine. From an application perspective, I've seen some apps that limit the number of users regardless of the PSQL licenses.