When to update an Arxiv posting vs. creating a new post?
I agree with Mangara that there's no problem with updating the previous paper if your new version subsumes the previous one.  It's understood that results in preprints are sometimes improved before publication, and so this won't trouble anyone.  Furthermore, there are several reasons why you should (and not just can) do this:


It's best not to leave incomplete versions of the paper lying around, since someone may run across them and never realize there's a better version elsewhere.  For example, it's better if readers following the reference from B learn that there's a new version, rather than just seeing the old one and potentially assuming that's all there is.
Posting very similar papers can look bad, like you are trying to inflate your paper count with minor variations.  That's not your intent, but someone browsing through your arXiv papers won't having any way of knowing.  You might also trigger the arXiv flag for text overlap between your papers, in which case the similarity will be explicitly pointed out to everyone.


The comments field in your arXiv submission can help address the potential for confusion.  Whenever you make major changes to an arXiv paper, it's a good idea to explain in the comments what has changed, so that someone who has already read a previous version knows whether it's worth another look.  Highlighting the changes in this way will also help clarify things for readers following older references.