There was little expectation that Manchester City would be eliminated, but when it comes to penalties, the luck factor comes into play. They should have scored goals in normal time and won the match. After all, Real Madrid is also one of the biggest clubs, this result is not a surprise. Bayern passed the round despite not being much superior. It's difficult to predict who will win the cup, all four teams are the best in the world. It won't be a surprise who wins. Dortmund may be the team with the least chance, but even they have a chance. Real and PSG are bigger favorites.
Many people expect that City will not qualify for the next round, because they see that their opponents are quite tough and Madrid's performance is on fire. In my opinion, City has played their best game, yes, sometimes luck can be the deciding factor in winning, for City fans they might be a bit regretful at the time of the penalty, City was actually already ahead with Modric's failure and Silva really wasted an opportunity that was not needed, which is really a shame.
For Munich vs Madrid, in my opinion, it is very difficult to predict who will be in the final, because they are the same as their best performance, so at least Munich must win at their own home even though the score is close. There is no possibility that Madrid will respond with a much bigger score at their own home. What you said is correct, for the Dortmund vs PSG match, PSG has a much greater chance of qualifying for the final.