B-1 is wrong because you're not using marginal utility. On the second repetition, U(marginal)[$1,000,000] is either 1 or 0.1 depending on whether you lost or won on the first play. You can still add the utilities of events up, but the first and second plays are different events, utility-wise, so you can't multiply by 2. The correct expression is:

(50%*U($0) + 50%*U(the first million)) + (50%*U($0) + 50%*(50%*U(the first million) + 50%*U(the second million)))

which comes out to .775.