After the party refreshes itself, it returns to the inn where Sancho had been tossed in a blanket. Sancho is reluctant to enter. However, the landord welcomes them warmly. Don Quixote asks for a better bed than last time, and the landlady says she'll give him one if he pays better. His bed is prepared, and he goes to bed.
The landlady seizes the barber's beard and demands her tail back. He isn't willing, but the curate tells him to return it. They both return the borrowed items. The curate tells the barber to tell Quixote that he fled to the inn after they were robbed by the galley slaves, and he filled in for the princess' squire--for she had sent her own back to her country.
The travellers dine with the landlord, his wife, daughter, and Maritornes. They discuss Quixote's madness. The landlady gives the details about what had happened before with Quixote's first visit, including Sancho being tossed into the air with a blanket. The curate blames the books on chivalry.
The landlord objects, saying he is fond of reading such books himself. He often entertains guests with tales, and they often fill him with longing for adventure. Maritornes and the daughter like the romance of the tales.
The landlord shows the curate some of his books, and the curate wants to burn them. The landlord would rather have him burn his child. The curate denonces the works as a bunch of lies. The landlord asks him to listen to one of the delightful stories.
The curate tells the landlord that these things never happened, for the knights discussed in tales never existed. People should spend time developing their minds than reading a bunch of falsehoods that can only do them harm--like they did Quixote. The landlord says he won't suffer Quixote's fate because he knows that knights no longer exist.
Sancho is disturbed by the fact that knights no longer exist, for it means it is unlikely his master's promises will be fulfilled. He considers returning home.
The curate does find one book that does look intriguing and wants to read it. The landlord says it was something left behind by another guest, but it has been enjoyed by others who have read it. The others are interested in hearing it and ask him to read it aloud.