When wood and iron float together, the buoyancy is equal to the gravity they are subjected to.

If the iron block is put into the water, the buoyancy of the wood block remains unchanged (because the wood block is still floating), but the buoyancy of the iron block decreases (because the density of iron is greater than that of water, it sinks in the water, and the buoyancy at this time is less than its gravity), so the buoyancy they suffer together decreases, and the volume of discharged water decreases, so the water surface in the cup drops.