Creating Answer from comment:
In this 3 node cluster with no shared storage, cluster will only be able to handle single node going down. If more than one goes down, entire cluster goes down
No for 3 node cluster, assuming all nodes are voting, if one node goes down still you have 2 nodes(more than 50 % of votes/nodes) voting which is sufficient to keep WSFC up and running so WSFC will not come down if one of the node goes down.
Scenario 2: Since we have 3 nodes cluster, no shared storage along with File Witness and Dynamic quorum enabled, the benefit we have with this config is that cluster will still be running even if two nodes goes down and one node and witness is up and running. Is my understanding correct?
Yes, but let me add dynamic witness only protects from planned failovers or downtime. In your case, if 2 of the 3 nodes went down abruptly dynamic witness is not going to work and WSFC will come down( lack of quorum one node and FS witness is not greater than 50% of votes). The fact is simple, with sudden downtime registries are not updated to change witness dynamically hence dynamic witness is failed to perform its duties. Dynamic witness and quorum gives "last man standing" feature but subject to condition the nodes are gracefully shutdown