I would bet you money that 3 doesn't equal 3 inches, it's just a number. If you want to know what height your grass will be at setting 3, you should measure the distance between the bottom of the deck and a hard level surface, like your garage floor. Let's say at the 3 setting that distance is 1.5 inches. Then measure the distance between the bottom of the deck, and the mower blade (it should be between 1/4 and 1/2 an inch) and add that to the distance between the mower deck and the floor for your total height of cut.

I measure the length of the grass blades.