Okay - I think I got it.
Set of all subsets (power set*) is exactly the right way to think about this. The state space is the set of all states.
1) Definition of state:
"A state contains all of the information necessary to predict the effects of an action and to
determine if it is a goal state." (http://artint.info/html/ArtInt_48.html)
The actions in this scenario are simple: left, right, up, down. They are the possible movements a bug could make.
2) Definition of solution:
Solutions are sequences of actions that lead to the goal test being
passed.
If we only permitted MN states, one for each possible starting position the bug was in, then we would have a state space that gave solutions that were valid only for discrete starting positions. But, the solution must be valid regardless of the initial state of the bug. This means the solution must work for scenarios in which the bug could occupy any of the MN available squares.
In other words, the solutions must be valid for each and every subset (combination) of possible starting spaces, which yields the power set of MN, which is 2^MN.
Why? Because solutions that are valid for a given start state may not be valid for all other start states. And the problem requires us to find solutions that are valid for all start states. This is also why the state space is much larger than MN even though in reality our bug only occupies 1 of the MN positions upon initialization. Just because a solution (sequence of moves) works when the bug starts at (1, 1) doesn't mean that solution (sequence of moves) will also work for the bug starting at (2, 1).
Bonus Question: Why isn't the state space just 1, the full set where
each of the MN squares 'has' a bug (and bugs are permitted to move
on top of each other)?
I was tempted to say that just because a sequence of moves gives a goal state when the bug can start at all of the MN possible positions, that doesn't mean that same sequence of moves gives a goal state when the bug starts at (3, 2) or at MN - 1 or MN - 2 etc. possible positions. But by definition it must (a solution over all starting points must be a solution over every finite subset of starting points).
So I think the reason you evaluate starting states other than "all boxes have a bug" is because the solution generated by evaluating only that state may not be optimal. And in fact this interpretation is borne out by what the homework gives as admissible heuristics for this problem:
The maximum of Manhattan distances to the goal from each possible
location the insect could be in.
OR
The minimum of Manhattan distances to the goal from each possible
location the insect could be in.
The case where we just have one starting state with bugs on all the boxes (with the magic ability to be on top of each other) is the relaxed problem we use to define our heuristic. Again by definition of admissibility, since the heuristic must not overestimate the true (arc) cost of an action, and since arc cost is given by Manhattan distances, both the heuristics above are admissible. (The maximum case is admissible because each possible location for the bug is, in fact, possible - thus the max cost is possible).
*If you don't know what power set means, all you need to know is that the power set is the set of all subsets of a given set. It is given by 2^(size of the set).
In other words, if I have a set of three balls {red, blue, green} and I want to know how many different subsets I have, I can calculate it as follows. A subset either has the element in it (1), or it doesn't (0). So {0, 0, 1} would be the subset of only the green ball, {1, 1, 1} would be the subset of all the balls (yes, technically this is a subset) and {0, 0, 0} would be the subset of none of the balls (again, technically a subset). So we see that the number of all subsets is 2^3 = 8. Or in our problem, 2^MN.
