The Duke and Duchess enjoyed the adventures so much that they decide to give Sancho his island right away. Sancho is delighted by the news, and the governor predicts that once Sancho begins governing he’ll never want to stop, because it’s so much fun to order people around. Quixote heartily congratulates his squire, emphasizing, though, that the island is a gift from god and not a reward for his merits. He gives Sancho a great deal of useful advice, emphasizing virtue, fairness, mercy, and selflessness.
The gift of the island is another trick, in its way, because it is meant to confirm Quixote’s delusions. But, joke or not, the gift is real. Unlike the earlier jokes, this one bleeds over into reality. Quixote is remaking the world around him to be more like the world he imagined.