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I have tested this, and it does increase damage.

I do most of my tests in the King Dude story quest, because you can exit out before completing the quest and run it over and over again. On my...

My experience with this is that difficulty is scaled based on character level, not number of players in the group. If a higher level character enters the map, it does increase the difficulty.

I...

Yes, you get bonus xp when there are other players with you. One of the in-game tips states:

"Tip: When playing with others you gain an experience bonus for each additional player!"