I'd be honest with him and say that you're still new. (You'll avoid sounding dumb altogether if you admit that you're still new to the game)
Why don't you ask him to explain what instances are? I think most WoW players love to talk about the game, and he'll probably get his chance to blab away about instances while you learn a thing or two about it.
I'm sure he'd loooooove explaining the nuances of instances to you. And I bet you'd love to listen too.
EDIT: Quests are indeed marked by the characters with gold Exclamation mark over their heads. It usually amounts to kill X amount of things or gather X amount of things, then return to the same character who now has a gold Question mark over their head once the quest is complete (Questing is the very basis of many MMO's. You'll be doing a lot of this in WoW.)
Instances however, are not quite as you explain it. To do an instance, you'll be grouped with several other people and be sent into dungeons/keeps to essentially raid it. Instances are populated by exceptionally tough enemies that (if you are around the same level as them) are impossible for you to kill by yourself. Including bosses, which are even tougher. This is why you need a group to complete instances:
1) a Tank to go toe-to-toe with all the elite enemies (Such as a warrior, Druid, or paladin) This is because these classes have very high armor and damage resistance, enabling them to soak up the very high damage that dungeon enemies are capable of. (If a mage tried going toe-to-toe with half a dozen elite dungeon enemies, the mage will quickly die a horrible painful death.) Tanks hold the attention of these enemies while everyone else kills them.
2) A healer to keep the tank alive, and to heal any other injured people. Without a healer, the tank will die. Which will cause all of the enemies to go berserk and murder the entire remaining group.
Without a tank AND a healer, instances are essentially impossible to do.
3) Damage dealers. These are the bread n' butter classes that deal damage in various ways. While the tank holds attention, and the healers keeps the tank alive, it is the responsibility of the damage dealers to kill everything before they kill the tank or the healer runs out of mana.
^So as you can see, instances are much more complicated. They're basically isolated levels with very powerful enemies that require a group of people to combine their efforts in order to succeed. (Some quests require you to complete instances.) And there's also very strong loot to be found in these dungeons, usually dropped by bosses.
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