1) I can't find any reason to drop something in Easy Mode, other than thrown weapons. Is there an item limit I missed? Otherwise, I just hold onto everything for trade, workshop, or as sacrifice for level 5 play. Or in normal mode I can drop and marker it if someone else wants to pick it up while I move.
You are playing correctly, there is no item limit.
2)Pg 21 - Use a specific space - even if it is used for a quest, do I still get to use it as its original function? (i.e. do I still get treasure from treasure space used for a quest fulfillment?)
You don't get to use the original function of the space.
Example: you have two quests, first one: 'use treasure space: restore 2 health', second: 'use treasure space: restore 2 essence'.
You can use treasure space to: restore 2 health, restore 2 essence or gain treasure.
3)Does ritual cloak make *all* my attacks arcane or just the abilities of the explorer?
All. Even from traps and exploding barrel.