PS X|NS Z
----|----
a 0| b 0
a 1| a 1
b 0| c 0
b 1| a 1
c 0| c 1
c 1| d 0
d 0| a 1
d 1| a 0
3 is CORRECT. The correct Z sequence is obtained by starting in state b with input X = 0 and computing the next state Y=c and present output Z=0 from the table. Thus to start we have:
X = 0...
Y = bc...
Z = 0...
Note that the next Y = c is written to the right of b and present output Z = 0 is written below b.
Now repeat this process for the rest of the inputs 001110:
X = 0001110
Y = bcccdaab
Z = 0110010