why do you suppose the host dubbed him knight?

"The innkeeper, as has been said, was a bit of a jokester, and already having some suspicion about his guest’s lack of sanity, became convinced of it when he heard these words. In order to have some entertainment that night, he decided to humor him, so he said that don Quixote was very correct in what he wanted and asked for, and that his goal was proper and natural for knights as important as he appeared to be, and as his gallant presence proved."

Sorry, the innkeeper thought he'd have some fun, but things got a bit out of hand. This quote describes the innkeeper's reaction to his departure;

"The innkeeper, eager to see him leave the inn, responded with no less rhetoric, although with fewer words; and without asking him to pay for the lodging, let him go."