Meta-game Battler definitely sees everything we're shown. In ep 7 Beatrice shows herself in-game, and meta-Battler and meta-Beatrice talk about it. Game 2 Battler did not actually see Beatrice. (And I don't think she actually exists on the island.)

Meta-Battler is not retarded to deny the witch even after seeing fantasy scenes. If I show you a picture of the world being flat and tell you it is flat, should you believe me? I hope not. In much the same way, Battler should not believe everything the "witch" shows him.