Prince Myshkin quickly settles himself in Lebedev's summer cottage in Pavlovsk. Though Lebedev makes sure the prince receives few visitors aside from himself, many of the other characters are also in Pavlovsk: Varya and Ptitsyn own a summer house in the town, and General Ivolgin, Ganya, and the Yepanchins also are present. On the third day of Myshkin's stay in Pavlovsk, Madame Yepanchin—who is convinced that the prince is on his deathbed—comes to call on him along with her three daughters and Prince S., who remembers that he is an old acquaintance of Myshkin. Kolya announces the visitors shortly before their arrival. It just so happens that, at the same time, the Ptitsyns, Ganya, and General Ivolgin also come to visit Myshkin. The entire company establishes itself on the spacious veranda of Lebedev's cottage.
Suddenly everyone starts joking about the "poor knight." Madame Yepanchin is a bit irritated because there is a hint that they are talking about Myshkin. Kolya remarks that Aglaya, as she was leafing through Don Quixote, said that there was nothing better than a poor knight. General Yepanchin and Yevgeny Pavlovich Radomsky, Aglaya's suitor, join the company. Aglaya recites Pushkin's poem "The Poor Knight," which is about a knight who idealizes Mary, the mother of Jesus Christ. Instead of the initials A.M.D., which stand for Ave, Mater Dei, ("Hail, mother of God"), Aglaya says N.F.B.—Nastassya Filippovna Barashkov—implying that Myshkin has chosen Nastassya Filippovna as his ideal. Aglaya begins in a rather mocking tone, but soon speaks very seriously and earnestly. Most of those present—with the exception of General and Madame Yepanchin—notice the substitution.
Myshkin has five other visitors: General Ivolgin; Keller, the "boxer" from Rogozhin's company; Antip Burdovsky, who claims to be the son of Pavlishchev, the late benefactor of Prince Myshkin; Hippolite Terentyev; and Mr. Dokrorenko, Lebedev's nephew. The group behaves rather insolently and rudely. Lebedev gives Madame Yepanchin a newspaper article that concerns Myshkin and the newly arrived guests (the Prince asked Ganya to handle this matter a month prior to this meeting). Upon Madame Yepanchin's insistence, Kolya reads the article.
Written by Keller, the article is a slanderous and insulting account of the history of Myshkin's family and his own, particularly regarding the prince's illness and his benefactor, Pavlishchev. The article also alleges that Burdovsky is Pavlishchev's illegitimate son, and that the prince must therefore give Burdovsky some of his money. Everyone is shocked at the article and feels ashamed to hear such insults read out loud in front of Myshkin. In the face of rude exclamations by Burdovsky and his group, Myshkin says that the article is full of slanders. Ganya has visited Burdovsky's mother and learned that Burdovsky is not indeed the son of Pavlishchev. The prince is not angry, however, as he believes that Burdovsky's lawyer tricked his client into thinking he was Pavlishchev's son and urged him to pursue the matter. Myshkin feels pity for Burdovsky and promises to pay his "simple man" 10,000 rubles anyway, in the memory of Pavlishchev. The prince then invites Ganya to tell of his findings in more detail.
Ganya announces that Burdovsky cannot possibly be Pavlishchev's son, as Pavlishchev left Russia a year and a half before Burdovsky's birth. Pavlishchev did indeed help Burdovsky and his mother, however, as long ago Pavlishchev had been in love with Burdovsky's aunt, a serf girl. Burdovsky quickly renounces the claim on the 10,000 rubles and says he wishes to leave. Before doing so, he returns an envelope with the 250 rubles the prince sent him. Kolya remarks that the article said that the sum had been fifty rubles, not 250. Ganya looks in the envelope and notices there are only 150 rubles inside.
Burdovsky's friends accuse Myshkin of sending the money as a charity. They say they will repay the missing 100 rubles, which they claim had to be paid to the lawyer. The group continues to act rudely and shout haughty insults at Myshkin. Suddenly Madame Yepanchin stands up and angrily denounces Burdovsky and his group. She also denounces the prince for his willingness to give Burdovsky money and offer him his friendship despite Burdovsky's slander. Madame Yepanchin wishes to leave, but Hippolite asks her and everyone to stay for tea. Even though it is eleven o'clock in the evening, everyone decides to satisfy the wish of the dying young man, so they all stay.