As you probably know, choice A is the choice that is the university rule. You are bound by contract to always follow that rule, as are your students. So yes, choice A is the choice that you should go with. Academic Dishonesty is the worst crime in the academic world and should be treated as such by ALL professors. Just this year, my university's dean of Medicine was found guilty of plagiarism, and he was fired from the university and essentially blacklisted across the academic world. You know what he copied? A graduation speech. Not a paper, or an idea, but a graduation speech, because it was plagiarized right from the Harvard graduation speech given the year before.
And as you yourself said, it is draconian to use choice B. If a scientific journal used the same idea, then essentially they would force every author to not only resubmit, but rewrite the entire paper, costing hundreds of thousands, maybe even millions of dollars in time lost. The journal would fold immediately.
Oh, and cheaters never get 4.0s, I can guarantee you that. They're typically the ones just trying to squeeze out a passing grade so they can go onto the next year. The guy/gal that's 'cruising' along with a GPA of 4.0, is probably doing a hell of a lot more work than you think (s)he is, and they're probably pretty damned smart.
As for your father's story, no one has a clue about what to do on their first day, no matter how trained they are. They're in an entirely different environment, outside of their comfort zone, most likely using entirely different procedures than how they're used to, and they know that they're on a tight line and if they screw up, they could get fired. Not to mention, most of what you learn in university is either false or glazed over, unless you have done large amounts of research on that topic.