You are using a mobile GPU, so i'm assuming you are using it in a laptop, probably in a configuration with a 3rd Gen Intel Core CPU (Ivy Bridge). All mobile versions for the Ivy Bridge feature the Intel HD 4000 graphics as integrated graphics processor (IGP).
Summary
- Delete /etc/X11/xorg.conf (don't forget to make a backup)
- Manually switch between IGP and dedicated GPU using either Bumblebee or PRIME.
Background
This configuration has the advantage, that for less graphic intensive applications the IGU can be used which has a lower energy-consumption. However, in my case it meant, that Ubuntu always used the IGU independent of whether I had installed the Nvidia drivers or not. That's why your configuration says This driver is activated but not currently in use.
Low Resolution Problem
You probably have never used your Nvidia card until you asked the question. The xorg.conf generated by nvidia-xconfig expects a Nvidia card to be used, that is not the case, so I guess the X-server uses some failsafe output mode. That Problem can easily be solved by deleting xorg.conf file.
sudo rm /etc/X11/xorg.conf
Than restart your Window Manager (or reboot), e.g.
sudo restart lightdm
You should have your resolution back now.
Switching between IGU and dedicated GPU
There are multiple ways how to approach enabling support for hybrid graphics. The Hybrid Graphics Linux Team (new user max 2 links, google for launchpad+hybrid-graphics-linux) gives a comprehensive overview. From what I've seen the easiest to use and most advanced technologies are Bumblebee and PRIME. In both cases you start the applications that should use the dedicated GPU with a specific prefix.
Bumblebee
Bumblebee either uses the free noveau or the proprietary Nvidia driver. So far I only tried Bumblebee, which seems to be the better working solution for the Intel and Nvidia combination.
There is an Ubuntu wiki page (google wiki+ubuntu+Bumblebee), that describes the steps on how to install it. After the installation you can run applications using the dedicated GPU by prefixing them with optirun. E.g.:
optirun glxgears
The Nvidia settings will only work if the card is active so you have to run
optirun nvidia-settings -c :8
to get to the settings. The monitor configuration works via the default tool.
Addendum
PRIME seems to be working good in the combination AMD-IGU with Nvidia GPU. But There does not seem to be much comprehensive reading about it.
The hybrid support is still somewhat early and depending on your specific configuration either PRIME or Bumblebee may be the better solution for you.
Best Answer
I had this same problem just now after I installed some updates, exactly the same as described, except that it worked fine prior to the update.
I got around the issue by opening 'Additional Drivers' and reactivating my driver, as it had been deactivated for some reason.
After a quick reboot it was working fine, although I did have to manually select the resolution (the correct option was there this time), as it didn't do so automatically.
Looking at the age of this post I would think the problem is already solved, but hopefully this will be of help to anybody else with the same problem.