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A Hot Dog is a sausage-like food that usually is served to people inside of a bun. The Hot Dog Vendor made a living out of serving hot dogs. He gives you a hot dog which you later give to Ned Noodlehead to trade for the Medallion.
It serves the same purpose as in Super Power Island.
In Super Power Island
After getting a Super Hero ID, one of the police officers will grant you access to the Subway but first will ask for a hot dog. He gives you a coin to buy one from the hot dog vendor. The hot dog vendor will give you one, but doesn't have any buns, so he gives you one without a bun. Instead, you use a pretzel as a bun. The policeman enjoys having a pretzel for a bun, stating that it would be the "Best Hot Dog Ever."