I agree with the notion that where you sit is entirely up to you and your wife and nobody else.
I would personally disagree with the suggestion that you let your in-laws try watching your 2-year-old during Mass (and by "personally," I mean "STRONGLY"). We did this with my mother-in-law once because she was so disgusted by how mean and controlling we were being with our daughters during Mass (by "mean and controlling," she meant, "not letting the then 6 & 7 year old girls bring toys and bags full of food into Mass with them"). We pointed out how well-behaved they were, but she insisted they were miserable and not enjoying Mass.
I'd forgotten how, when our son was little, she'd take him into the cry room and let him run wild, so apparently Mass was supposed to be a fun occasion for kids in her eyes. I decided to let her watch our girls during Mass just so she could get a taste of how we operated. I told her that the only way I'd agree to it was if she'd abide by our standards of behavior, meaning that, while under her watchful eye, they weren't allowed to play, fight, or disrupt anyone else, and if things got out of control, she had to take them to the back of the church until they were under control. I also told her that she wasn't to ask us to reign them in when her methods failed.
Without rehashing the whole mess, I'll just sum up by saying that feeding little girls candy and juice all throughout Mass is no way to keep them under control. Walking out when they get out of hand and reneging on an agreement is also no way for an adult to behave. It took us a few weeks to get them back to being their normal, well-behaved selves at Mass after that (they couldn't understand why we wouldn't let them have candy since Grandma did), but if nothing else, it taught us a good lesson. Since then, we've seldom even let them sit at the other end of the pew with relatives, let alone allowed anyone to watch over them or make suggestions about how we should handle them at Mass.