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I'm glad I'm not the only one that is befuddled by this question. I think I spent 2 minutes staring at this question trying to make logical sense out of it.

The encapsulation process sort of makes sense and I thought about it but then you have the de-encapsulation process on the receiving end. I thought about the Network layer as being the layer where the WEP encryption would end but then the Transport and Application layers wouldn't take advantage of the WEP encryption on the receiving end either.

I'm still confused over this question and need more clarification. I'm still leaning towards the Physical layer though.