How does iOS 5 decide which home screen to put new icons on?
Screen A that you refer to is the original 'Apple' home screen. Your observation is correct. The only time an app will install on screen A is when it is already present (or moved by you) and you are updating to a newer version of the app.

All other new apps will be installed in the screen closest to what you define as Screen A when possible (i.e. if Screen B is already full, it will go to screen C and so forth). New apps will never get installed into folders (unless you update the app that is already within a folder)