Answer:
Paragraph 1.
Step-by-step explanation:
Setting is demonstrated as the description of time and place along with the mood in which the narrative/story took place and functions to offer a background and context to the readers that aids them to understand the text more effectively and comprehensively.
As per the question, paragraph 1 would be categorized as the paragraph featuring a dialogue that discloses information about the setting as it involves a description of time and place as reflected by the description 'fourth of July' and '...at home' respectively. It also displays the mood as mirrored by the word 'sighed' that proposes a relieved atmosphere. Thus, paragraph 1 is the answer.