What is correct in this situation?

You answered correctly. This sign shows that the built-up area of Wilster is ending, indicated by the town name with a red slash. This means speed limits and traffic rules for outside built-up areas now apply. The upper part shows Schotten is 6 km ahead, but the main rule here is that you are leaving the current built-up area. This is why answer 1, "a built-up area ends," is correct.