What happens if there is no proxy defined but all the settings say “use proxy”?

If there is no proxy defined (Proxy Host field) in either the application level or Source Package level, then no proxy will be used, no matter the other proxy related settings (Proxy Port, Proxy PAC also) from either level.

Secondly, if there are proxy settings both at application level and at the Source Package level, then the Source Package ones will have priority over the application level ones.