Levels are an indication of relative power that can apply to characters, mobs, npcs, quests and items.
The higher the level, the more powerful the thing related to it is.
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Characters starts the game at level 1, and earns level by gaining experience.
Higher level gain significantly increase Health, Mana (when applicable) as well as access to more powerful abilities and items.
The "level cap" is effectively the last level in the game. At WoW's release, it was level 60, and has since been pushed back to 70 with The Burning Crusade expansion pack.
NPC and Mobs' level is static, it doesn't change once they are created on the server.
The level of a npc indicates just how powerful he is if engages in combat as well as what types of abilities he is likely to use.
Two mobs of similar level should pause a similar challenge, give similar experience and award similar reward for being slain.
Most items are given a minimum level required for them to be equipped.
Items also have a 'Item level' (or Ilevel) that determine how many points they have allocated to their statistics.
When viewing another player, mobs, npc or even a quest in your quest log, you will see a color scheme to show you the difference in level between your character and the targeted 'object'.
* Level 1-9: 4 levels lower * Level 10-19: 5 levels lower * Level 20-29: 6 levels lower * Level 30-39: 7 levels lower * Level 40-70: 8 levels lower Green quest/mob/players are usually easy encounters, and thus will give lessened reward for being completed/defeated.
It is important to note that on top of the skull/red/orange target having more Health and damage, you are further penalized by having an increased miss rate and lowered critical rate against target that are Skull, Red or Orange. The higher level foe however, see his hit rate and critical rate increase, making the fight usually quite one sided.
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