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:

1. Yes, but not exactly. Everything goes through Mullvad, but Firefox goes through Proton going through Mullvad.
2. No, they’ll just see the Proton information.
3. 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.