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I have setup SharePoint 2010 on my local developer machine (Windows 7) so that I can use Visual Studio to make solutions. However, when I go into the "Site collection features", I do not see Document Sets as an option. Is there someplace that I need to go to enable/install this capability?

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First off its not available in SharePoint Foundation, so you need the full SharePoint 2010 Server.

Here it can be enabled at site collection level. The feature is called Document Sets.

When enabled you can add a document set content type to your list, giving you the ability to create document sets from the "new document" button in the ribbon.

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