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I don't think it is based on highest character level. I know by parallel experimentation (running 2 or 3 parties through one bit at a time to compare things like mana development of Bish vs. pure caster). I ran one group of 4 plus 2 who i killed at L1; a group of 5 plus 1 who i killed at L1; and a goup of six. When specific things happen, like merchant-inventory leveling, the dead are averaged in. This is very clear at Crock's. As far as the monsters go, that difference is really clear now that the average is 24 levels more for the 6 live char's than for the 4-with-2-dead. The 4 got 6 bandits and 4 crimson poppies on Arnika Road, where the 5 got a Sige, 6 bandits, 2 wasps in one fight and 3 acidvines with 4 bloodvines in another, while the group with 6 even had berserkers as soon as they got to A-T Road. All the living chars were L7 then.
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