I just updated to 16.2.5, and issue still occurs.  Complete desktop shrinks when host window is scaled down.  Drop-down menu options still grayed-out.  Bouncing these options via preferences menu appears to have no affect for auto-sizing. 

Removed vmware tools, restarted windows, reinstalled vmware tools (complete install), restarted windows again.  

vmware tools for windows version: 11.3.5, build 18557794

host video adapter: NVIDIA GeForce GTX 1060 3GB

host video driver version: 27.21.14.6089