Tod lives on the third floor of the Bernardino Arms. On his way up to his room, he pauses on the second floor for a moment, hoping to see Faye Greener, who lives on that floor. When Tod opens his own door, he finds a business card belonging to Honest Abe Kusich with horse racing tips on the back.
Abe, Faye, and Faye's father Harry are featured in a set of lithographs called "The Dancers" that Tod is currently working on. The figures in the lithographs appear differently in each plate, but the audience watching them—the same "audience" of people standing around in the streets that Tod notices in Chapter 1—remains the same.
Tod first met Abe, who is a dwarf, upon first moving to Hollywood, a time when he was living on Ivar Street in the Chateau Mirabella. Tod found Abe lying on the floor in a bundle of women's clothing outside a room on Tod's floor. Abe was fighting with a woman, who opened the door only to toss Abe's clothing into the hall. Tod let Abe dress in his apartment. Abe badmouthed the woman down the hall and then tried to pick a fight with Tod himself. Abe's mood changed swiftly and he soon gave Tod a tip about a racehorse named "Tragopan." Then Abe became angry again, calling Tod "college man" when Tod guessed correctly that the owner of the horse was Greek. Later, Tod learned that Abe's friends treat his belligerence as a joke.
Tod ran into Abe again a few days later, at a stationary store, and mentioned to Abe that he was looking for an apartment. Abe took charge of Tod's housing search, which is how Tod has ended up here at the San Bernardino Arms. Tod had not liked the look of the unclean rooms, but rented one anyway when he saw Faye in the building.
Tod, who had fallen asleep, wakes to find that it is eight o'clock in the evening. He bathes and gets dressed. As he fixes his tie in the mirror, his eyes rest on a signed photograph of Faye Greener from a film in which she had been an extra. Faye has kept her relationship with Tod impersonal because, she has told him, he is neither rich nor attractive. In the photograph, Faye is lying down, wearing a harem costume. Tod remembers driving to Glendale to see her in the film. She had only one line and hadn't spoken it well.
Faye is tall, with straight shoulders and legs and a wide face with platinum hair held back by a blue ribbon. Tod meditates on her photograph, thinking she looks less drunk with pleasure than as though she is inviting one to a "struggle, hard and sharp." Tod imagines that accepting Faye's invitation would be like jumping off a tall building. He then self-consciously laughs at these dramatic words he has used in an attempt to describe Faye to himself. He reasons that she will not have him no matter how much he wants her. Tod finishes getting ready and leaves his room for a party at Claude Estee's.
Chapters 2 and 3 set up the fast-paced narrative movement of The Day of the Locust. Each chapter is short, packing in a lot of activity and usually opening with an image—such as the film army in Chapter 1 or the description of the San Bernardino Arms in Chapter 2—then following up with an explanation of that image. Flashbacks, such as Tod's initial meeting with Abe, offer additional changes in scene and fill in the information about what Tod has been doing and who he has met since his arrival in Hollywood three months prior. These formal effects—picture followed by explanation, rapid scene jumps, and flashbacks—combine to create an effect similar to film, underlining the content of the Hollywood novel with a form appropriate to its setting and subject.
The two new characters introduced in these chapters, Faye and Abe, are both related to the "masqueraders" Tod notices in the streets on his way home. Abe's clothing seems a discordant costume: though his Tyrolean hat and dwarf size suggest that he is dressed as an elf, the lower half of his body wears simply a man's suit. Faye's harem costume in the photograph that Tod owns clashes with the sexual look she typically wears on her face and the childish blue ribbon she typically wears in her hair. Faye, a movie extra and aspiring actress, is aligned with the masqueraders of Hollywood. Though Abe is a bookie by trade, he is also portrayed as an actor in a sense—Tod finally understands that Abe's boisterous belligerence is only a trademark act, meant to be almost affectionate rather than not truly confrontational.
Abe and Faye are also similar in the contradictory effects they have on Tod. Just as Tod is repulsed by Abe but enjoys his company nevertheless, Tod feels attracted to Faye despite his feeling that the violent suffering she offers is unattractive. These mixtures of attraction and repulsion Tod feels towards Abe and Faye are reflected in the ambiguity of his artistic study of Faye, Abe, and Harry called "The Dancers." Tod has drawn the audience as "uneasy," as he has seen them in the streets, while Faye, Abe, and Harry are caught in single frames of dance movement that are more maniacal or violent than graceful. The dancers look like "hooked trout," suggesting a reversal of the common description of a audience being "hooked." In the painting it is unclear who is more captive, the audience or the performers. As with Tod's relationships with Abe and Faye, the relation between the audience and performers in "The Dancers" is not based on entertainment, love, or enjoyment, but a rather bizarre element of compulsion.
Tod's status as a Hollywood outsider is further emphasized in these chapters. We learn that Abe became immediately suspicious of Tod's knowledge of Greek, however scant, and accused him of being a "wise guy a know-it-all." Just as Tod's intelligence earns him only derision from Abe, we see that it does not further his case with Faye: it seems that money or good looks are the only markers of status in the Hollywood community.