All linework should be created in model space while all dimensions and text should be in paper space. Well, at least, that is what I would recommend. As for the height of your paper space text, assuming you used the default template for AutoCAD drawings (acad.dwt), and since it is based on the Imperial not Metric system of dimensioning, I would suggest a text height of 0.125 (the decimal equivalent of 1/8th inch). One other suggestion. Text and dimensions should be on their own separate layers with distinctly different colors. Consult the instructions P-F provided you.