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Are things much different under the expert setting? (i.e. more encounters or difficult encounters)?
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The main differences are:
1. In expert mode, your skills get up more slowly through use.
2. In expert mode, it's more difficult for you to hit monsters (assuming the same skill), but its more easy for monsters to hit you.
Combined with the lower skills from (1), that makes alls fights more dangerous for a long time.
3. It is told that Chances for stronger monsters are a bit higher, and monsters respawn a bit more often. Since i didn't play often at 'normal' (only first half game, and some solos), i don't know if this is true.
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Is the probability of a rare item dropping increased with the difficulty level?
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I don't think so.