I am not sure if the click event is valid on options. i.e. use 'change' event handler, instead of 'click'.
Try this Working Demo here: http://jsfiddle.net/HVSyC/
Rest should fit your need :)
Further if you keen: Click event on select option element in chrome
Code
var $x = jQuery.noConflict(true);
$x(document).ready(function() {
$x(".group_tag_dynamic").hide(); //default
$x("select[name='action_top']").change(function() {
alert(this.value);
if(this.value == "Delete")
$x(".group_tag_dynamic").hide('slow');
else if(this.value == "Set Under")
$x(".group_tag_dynamic").show('slow');
});
});