I finally did it! LOL.
After a lot of gnashing of teeth and other dramas, I finally solved the mystery of why my dropcaps had extra spaces underneath. It had to do with the margin at the bottom. Sheesh.
Anyway, here is a screencap of the final product on Kindle Previewer, with the dropcap letter finally the right size and right in place. For other noobs like me who might be interested, this is what I did.
First, I tweaked <span.dropcap> in sigil, with the following end result:
I guess that is an ugly code, or whatever, but it worked!
Also, when converting from epub to azw3, I made sure the eighth value in the font size rescaling key was the same as my font-size (80). And voila!
So now my only issue with azw3 is the large line spacing, but I have learned to live with that. IMHO, azw3 just looks much, much better than mobi. Call me OCD but there you go.