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Are ships still divided by class of service ?

Not generally. Most ships have common areas. The food will be the same in the same dining rooms and everyone sits together at the same shows. A few lines like Cunard, do still maintain a "class" type level of service. Different "categories" dine in different dining rooms and some areas of the ship are out of bounds for certain passengers.

Why are there such a variety of rates ?

It depends on the size, location and type of cabin. The cabin size, bed arrangement, view and location on the ship will determine the price. Small, lower level, inside cabins are the least expensive. Outside staterooms, amidship on the upper decks bring a premium. Upper deck suites or outside staerooms with verandas are the most expensive.

If the food and entertainment are the same shouldn't I just book the cheapest cabin ?

It depends on how much time you will be spending in your cabin. They wiil be smaller and not everyone will be happy in a more cramped room. A little additional cost could make for a much better vacation. You may spend more time than you think in the cabin. After all, it will be your home for the entire cruise and space is important. Only you can decide if the price difference is worth it . The lines price the staterooms in gradients. You will spend more to get a porthole or window and for a more desirable location. If you are used to staying in suites at the nicest hotels, a small cabin is unlikely to make you happy.

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