It's a VPN within a VPN. So all your traffic over the Mullvad VPN connection has a VPN within it going to Proton (but only for Firefox).
To answer the questions directly:
Yes, but not exactly. Everything goes through Mullvad, but Firefox goes through Proton going through Mullvad.
No, they'll just see the Proton information.
It slows down your connection! That's a lot more extra hops. Practically...I suppose if the "inner VPN" was necessary to connect to a specific host (like a work VPN) then it could be useful. For example you use Mullvad on your router, but your work laptop uses a VPN to connect to resources needed to do your work. Other than that I can't see why you'd need to use 2 at the same time.
VPN alone is not able to grant you real privacy, and it is just one piece of the process. Websites can fingerprint you through data from your browser, CPU/GPU model, among others.
The scheme is so bizarre that not even through the use of virtual machines does it grant real privacy.