We can use the subset- or powerset-construction to go from the NFA to a DFA by considering subsets of the states of the NFA to be the potential states of a corresponding DFA. The initial state of our DFA will be {q0}, meaning that only q0 can be reached before reading any input. After reading an a from {q0}, we can reach q2 by consuming the a and then q0 again by taking the lambda-transition. Therefore, f({q0}, a) = {q0, q2}. Upon reading b in {q0}, we can only go to q1; so f({q0}, b) = {q1}.
We have introduced two new states, {q0, q2} and {q1}, in the DFA which we need transitions for. A moment's reflection will show that {q0, q2} has exactly the same transitions as {q0} does. On input a, q1 can go to q1, q2 or q0 (via q2); on input b, it can go to q2 or q0 (via q2). So, f({q1}, a) = {q0, q1, q2} and f({q1}, b) = {q0, q2}.
We have already seen {q0, q2} and know its transitions. However, we now need the transitions for {q0, q1, q2}. It seems that on input a, all of the states of the NFA can be reached from some state; the same is true of input b. So, f({q0, q1, q2}, a) = {q0, q1, q2} and f({q0, q1, q2}, b) = {q0, q1, q2}.
We did not introduce any new states on this iteration so we have all the states we could possibly need in a DFA. Our DFA looks like this:
q s q'
{q0} a {q0, q2}
{q0} b {q1}
{q0, q2} a {q0, q2}
{q0, q2} b {q1}
{q1} a {q0, q1, q2}
{q1} b {q0, q2}
{q0, q1, q2} a {q0, q1, q2}
{q0, q1, q2} b {q0, q1, q2}
All of the states except {q1} are accepting since they all contain the accepting state q0 from the NFA. Now, before we minimize this DFA, let's rename the states:
qA = {q0}
qB = {q0, q2}
qC = {q1}
qD = {q0, q1, q2}
We can iteratively cross off pairs of states that cannot be combined as follows:
qA,qB qA,qC qA,qD qB,qC qB,qD qC,qD
--------------------------------------------------
1. xxxxx xxxxx xxxxx
Reason: qC cannot be combined with others since it is
not accepting and the others are
2. xxxxx xxxxxx
Reason: f((qA, qD), b) and f((qB, qD), b) equal (qC, qD)
which was crossed off during the last iteration.
qA,qB cannot be crossed off, so these states can be
combined in a minimal DFA.
The resulting minimal DFA is:
q s q'
qAB a qAB
qAB b qC
qC a qD
qC b qAB
qD a qD
qD b qD