The Ivolgin household includes General Ivolgin; his wife, Nina Alexandrovna, Ganya; Ganya's sister, Varya; his brother, Kolya; and a boarder by the name of Ferdyshchenko. The entire household lives in an apartment, the size of which is beyond Ganya's means. Although Ganya is ashamed to take on boarders, his financial situation forces him to do so.

Prince Myshkin arrives at the Ivolgin apartment, following General Yepanchin's advice that he rent a room there. Myshkin meets all of the household's inhabitants: Ganya's sister and mother appear simply dressed yet dignified; Ganya's brother, Kolya, is a good-natured teenage boy. Once Myshkin is in his room, the red-haired and red-faced Ferdyshchenko visits him and asks him not to lend him any money.

Ganya's father, General Ivolgin, stops by Myshkin's room and says that he has a long history with the prince's parents, though he can hardly recall their names correctly. The general says that his household is in distress, partly because of economic conditions but also because of the upcoming marriage between Ganya and a dishonorable woman (Nastassya Filippovna). The general is firmly against the marriage, and he and Ganya are not on speaking terms.

Meanwhile, in the drawing room, Ganya's friend Ptitsyn tells Nina Alexandrovna and Varya that the marriage is to be decided that night. Ganya suddenly walks in and is annoyed to hear the conversation about his marriage. He again accuses the prince of talking too much. Ganya's reproaches are stopped, however, by Ptitsyn admission that it was he who called Ganya's family about the approaching decision. Nina Alexandrovna asks Ganya why Nastassya Filippovna would agree to marry Ganya if he does not love her, insinuating that her son is deceiving her. As the family argument continues, Ganya's rage grows beyond control. To avoid the conflict, Myshkin withdraws into the corridor.

Suddenly, the doorbell rings. The prince sees Nastassya Filippovna, who takes him for a servant. Everyone is utterly surprised at Nastassya Filippovna's arrival, as she has never before come to the Ivolgin home. Ganya is filled with fright at the thought of all the information she will be able to collect about his family, which she might later use to humiliate him in high society. Nastassya Filippovna attempts to mask the awkwardness of the moment by joking and behaving as if she does not realize the hostility of Ganya's family toward her. Myshkin is introduced to her, and she is surprised to learn of her mistake in thinking him a servant.

Suddenly General Ivolgin enters the drawing room and introduces himself to Nastassya Filippovna. Ganya becomes agitated, as his ambition and vanity are deeply threatened by his father, a man whose lying knows no limits. Although the general's wife and children ask him to leave, he refuses and continues to tell stories of his past—all utter lies. One of the stories General Ivolgin tells is of a time when he was in a train, riding together with a lady who had a dog. When he pulled out a cigar, the lady grabbed the cigar and threw it out the window, at which point the general took the lady's dog and threw it right out the window as well. Nastassya Filippovna catches the general's lie, saying that she has read this same story in the newspaper. Ganya is beyond himself with suffering.