If we choose latest version of Firefox or latest version of Selenium-Webdriver, we couldn't automate few tests because of either something not supported in latest version of Firefox or latest version of Selenium-WebDriver.
In such situation, which combinations of Firefox version and Selenium Webdriver version should we choose? (I mean, should we go for one/two version back of latest Firefox version and/or one/two version back of latest selenium webdriver version or some other combination?)
On
The Latest piece of softwares are always preferable, But the selection of browser version is highly depend upon your application under test.
On
For newer versions of selenium (v3), check out the selenium-docker releases here, https://github.com/SeleniumHQ/docker-selenium/releases, you can even use docker to test all the Selenium/Firefox combinations easily. For older versions of selenium (v2), check out the selenium site here, https://www.seleniumhq.org/about/platforms.jsp . I recommend moving to the docker path for local testing; then you can also use the docker files to migrate to cloud platforms.
On
When ever you download latest webdriver version, make sure that you look into https://raw.githubusercontent.com/SeleniumHQ/selenium/master/java/CHANGELOG
to check the latest browser version support.
Use whatever your acceptance criteria states. If you have to support an earlier version of Firefox because it is in a contract or requirement, then you must test that version and use whatever version of selenium is necessary