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Yes, increasing the difficulty level does increase your experience via a higher number of experience points earned per critter killed. In an oblique way, that affects both the type of monsters you encounter as well as the treasures received, in that a generally higher level of experience at each setting may result in a more interesting creature or a better treasure. For instance, I only saw taipans when I had a relatively low-level group reaching the Serpent Temple (by low level, I mean barely having flamedrop, if that). On the other hand, I only encountered the red dragons once, the nemuziti naga once, and the azmodian rocs once or twice, with much more experienced parties. Also, on one of my later games, I found the Lance of the Lady in Cet's lair. And Wizard Blades a few times over on the Isle of Sands.
I don't think that the quality of treasure improved for me any with ratlings, not that I noticed, anyhow. And I definitely did not notice a trend with finding treasures appropriate to my party members. Amazing how much Oomphaz war armor I picked up and various plate mail when none of my party members could wear them.
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