Does Forbidding Waste and Master Yi cancel each other out when a unit is damaged?

Yes, they effectively cancel each other out — the unit ends up at its printed Might regardless of damage.

Master Yi (Wuju Bladesman, Starter) gives a defending-alone unit +2 Might, while Forbidding Waste gives a defending-alone unit -2 Might. Per the arithmetic layer system (Rule 472.3.d), all increases are applied first, then all decreases — so the unit gets +2, then -2, netting to its base Might.

Damage does not interact with this calculation. Damage is tracked separately from Might (Rule 142) — it doesn't reduce the stat, it just marks how close the unit is to being killed. So whether the unit has 0 damage or 10 damage, the Might calculation stays the same: base Might + 2 (Yi) − 2 (Waste) = base Might.