Defeat the Underpants Gnomes

After defeating them, they'll run inside the mouse hole. Before following them, loot the bodies of the gnomes to get a pair of Gnome Gloves and a Miner's Patch. A new quest will start afterward. Change out of your PJ's and follow them.

Go around the mousetrap to the left the climb the stapled wires on the wall to reach the item bag. Get the Gnome Helmet, Super Bouncy Ball and some goodies inside. Continue to the left then destroy the pipe then shoot the live wire to startle the rat. This will make it run to the mouse trap and get killed. Continue to the left this time.

In the next area, climb the wire and destroy the partition to the left. Cross the fuses when they're not firing electricity then loot the bag to find Gnome Clothes and Gnome Pickaxe Head. Continue to the right and shoot the broken part of the pipe to create a pathway.

Continue to the right but a rat will block your way. Climb the wire then shoot the partition above. The insulation that will fall down will catch fire. Blow it up using your fart to get rid of the pesky rat blocking the way. While you're at it, destroy the partition to the right and smash the pipe to make a sharp shard of it fall down on another rat below. You can now go down and take out the remaining rat with ease.

Loot the bag to the right to get a Gnome Pickaxe. Climb up and exit through the wall.

After that, head to the right to find the gnomes. You have to fight them again. Once done, take the wire down and you'll have to face the warlock. His high armor will prevent you from dealing that much damage. However, you can use the tried-and-tested method of inflicting several debuffs like Bleeding, Burning and Grossed Out until his HP is worn down quickly. In the battle, your dad's balls will swing towards you so press the displayed button to evade it.

You'll wake up the next day with a new ability in your disposal: Gnome Dust. It allows you to shrink down your normal size and enable you to access previously inaccessible areas. Talk to the nearby gnome in your room to start a new sidequest (Phase 1)