What is the right course of action?

You chose answer 1, which is correct. The traffic sign on the right shows that you are on a priority road, meaning you have the right of way at this intersection. Both the yellow and blue cars must yield to you before entering. That’s why you go first, "before the two cars." Remember: at intersections with a priority road sign, vehicles on the priority road always go before those coming from side streets. This rule helps ensure safe and predictable traffic flow.