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Spread a napkin on your lap.
Literal
Knees [possessive-の] above [on-に] napkin [object-を] spread [command-なさい].
膝の上に means 'on the lap' (literally 'on top of the knees'). ナプキンを広げなさい is an etiquette instruction. 広げる means 'to spread out.'
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Spread a napkin on your lap.