 Solution

Read epsilon as actual set membership restricted to $X$, the interpretation in which ambient ZF makes the relation well-founded. The structure's axiom of extensionality assumption meansBy well-founded recursion on membership, defineThe recursion theorem applies because the Axiom of foundation makes the restricted relation well-founded and each predecessor collection is a set. The Axiom schema of replacement gives the set $M=\pi [X]$.

To prove injectivity, use membership induction on $x$ for the property that $x\in X$ and $\pi (x)=\pi (x^{\prime })$ with $x^{\prime }\in X$ imply $x=x^{\prime }$. Suppose this property holds for every $y\in x\cap X$. Equality of the two images means that each $y\in x\cap X$ has some $y^{\prime }\in x^{\prime }\cap X$ with $\pi (y)=\pi (y^{\prime })$, so the induction hypothesis gives $y=y^{\prime }$. Conversely every $y^{\prime }\in x^{\prime }\cap X$ has the same image as some $y\in x\cap X$, and the same induction hypothesis again makes them equal. Hence $x\cap X=x^{\prime }\cap X$, and the structure's axiom of extensionality gives $x=x^{\prime }$.

The map is onto $M$ by definition. The recursion immediately preserves membership, and its injectivity makes membership reflection valid as well. Moreover if $z\in \pi (x)$ then $z=\pi (y)$ for a predecessor $y\in X$, so $z\in M$. Therefore $M$ is transitive and $\pi$ is the required membership isomorphism. This proves the existence direction of the Mostowski collapse theorem.

An arbitrary binary relation must also be well-founded. Axiom of extensionality alone is insufficient in that interpretation: the one-element relation with a self-loop is extensional, but any collapse onto a transitive set would produce a set containing itself, contrary to Axiom of foundation. The actual-membership interpretation above supplies precisely the hypothesis otherwise missing; no analogous claim is made for a general ill-founded relation.