Generally speaking, number 2 (Leave as is. Printing will automatically interpolate.) is correct. Contrary to what many might believe, one of the functions of the RIP or DFE (Digital Front End - a RIP for digital printers) is to resample images as necessary to accommodate the actual device resolution and needs of the screening algorithm being used. If the resolution of the image is too high, the image is downsampled. If it is too low it is upsampled or "interpolated." For typical 600 to 1200 dpi digital printing, the 160dpi to 250dpi images should not be a problem. If you were printing offset at 2400dpi or higher and you had critical quality requirements, yes, the 160dpi imagery could be problematic.
What must be understood about upsampling or interpolation is that you are effectively trying to guess at what the missing pixels should be based upon what is already there and characteristics of the image. Some algorithms are better at this than other. Recent versions of Photoshop offer several upsampling (interpolation) options for increasing resolution that can conceivably reduce and "jagginess" that would occur with extreme upsampling. On the other hand, going from 160 to 300dpi (and by the way, 300dpi is not a magic number that you must achieve - it is a good guess as what generally works well for 1200dpi to 2400dpi printing) for a photographic image is not likely to be significantly improved by one of the miracle upsampling algorithms. Those work best on very low resolution raster images, especially those representing what would have better been in vector or text format.
By the way, neither InDesign, Illustrator, nor Photoshop will do interpolation during PDF creation although they do have downsampling and compression options.
Bottom line is that I would recommend that you let the RIP do the image resampling at least on a sample / proof run. If that suffices, stop worrying about it. If the quality is not sufficient, your choices are to either manually try one of the special upsampling algorithms provided by Photoshop or some third party plug-ins (some seem to help a bit, others seem a bit overrated) OR to reshoot the imagery and avoid what probably was too much cropping by getting closer to the subject or using a higher focal length lens. Use of RAW mode (as opposed to a digital SLR's JPEG mode might help immensely as well in terms of maintaining sharpness).
Let us know how you proceed and what works for you.
Thanks for the detail reply Dov. I will proceed to proof without interpolation, and inform of my results.
Alas, I cannot return to those places to shoot those pictures again. But of some 90 images only 8 are compromised and 2 near 160dpi.
By the way, while trying to take a single page test print on my color laser, I have 2 options:
1. Print directly to Printer from Indesign (I was but not able to find a way to "fit to page" option in either SW to make this happen)
2. Export to PDF
3. Print to PDF, then print from PDF to printer.
In the last (3) workflow in PDF printer setup, I noticed 2400dpi if I chose "Press quality" in PDF default settings. Is this not then like the RIP?
[ (Printing Preferences>Adobe PDF Settings tab>Default Setting dropdown (choose Press Quality)>Edit.. ]
I would strongly recommend against ever printing directly from InDesign.
Create PDF via PDF export from InDesign using the PDF/X-4 preset and then print from Acrobat. FWIW, the "Press Quality" settings are not recommended for modern workflows. PDF/X-4 is sufficient for virtually all professional printing unless your printer is a Luddite! The default for the PDF/X-4 settings downsample to 300dpi for any raster images over 450dpi for color raster images. There is never any upsampling / interpolation!
Try this and let us know if it suffices. We can tweak settings from there.