Hearing Don Quixote's cries, everyone races out. Maritornes quickly unties him, and he falls to the ground. Quixote mounts Rocinante and challenges the one who enchanted him to combat, providing the princess gives him permission.
The new arrivals are surprised by his words, but the innkeeper tells them that he is a madman. The people then ask if the innkeeper has seen a youth of fifteen years of age who is dressed like a muleteer, but he denies seeing such a person. The Judge says that he is probably there, for he has been following their coach.
Quixote is angry when the men walk away, but then remembers the oath to the princess not to take on any challenges until he does her boon. One of the party finds the youth sleeping by a muleteer. The man wakes him, and the boy--named Don Luis--recognizes one of is father's servants. They tell him he should return home quietly. The boy asks how his father knew he had been in this dress. The servant reveals that the friend he confided in told his father after seeing how distress he was, and his father sent four servants to seek him. Don Luis agrees to return home.
The muleteer tells Don Fernando and the others what has happened. Dona Clara is very agitated and faints. Don Luis suddenly refuses to return home, for his honor was at stake. The servants insist, partly out of duty to obey their master, and partly because they fear the father will die of worry. Don Luis is unmoved.
The Judge orders to hear the case. However, they are interrupted by a commotion outside. Two guests try to leave without paying. The landlord seizes them and demands his money. The two overpower him. The daughter asks Quixote to help her father. Quixote says he has to ask the princess’ permission first. Meanwhile, he advises her father to fight back and not to lose. Maritornes tells Quixote that the landlord will be dead before then. Quixote assures her he’ll bring him back from the dead or at least avenge him.
Quixote asks Dorothea’s permission to aid the governor of the castle, and she agrees. Then Quixote rememebers he can’t fight normal men and calls upon Sancho to defend the landlord.
Meanwhile, Don Luis is explaining his reasons for dressing as a muleteer and refusing to come home to the Judge. He tells him that he is in love with Dona Clara and wishes to marry her. The Judge is astonished. He advises the youth to return home, and he will consider the matter.
Don Quixote manages to calm the dispute going on outside by his words. He gets the guests to pay. Meanwhile, another guest arrives—it is the barber Quixote had attacked for his helmet. The man attacks Sancho and demands his possessions back. When the others approach, this barber tells them that Sancho robbed him. Sancho tells them that Quixote won the items in a fair duel.
Quixote is pleased by how Sancho defends himself and plans to knight him. The other barber identifies his belongings—the harness, the donkey, the saddlepack, and the basin. Quixote says he won the helmet fairly, and he allowed Sancho to take the harness, saddlepack,and donkey. It was their due by the laws of chivalry. Sancho goes to fetch the basin so Quixote can prove it is a helmet.