The short answer is: If you want the best quality, always set it to "best quality". Apple's designed iDVD so you don't have to think about it. Just tell it what you want it to do and do it.
There are a lot of things that go into determining the quality of the final video product. For better or worse, iDVD "hides" a lot of these things from the user. And it should. iDVD is a consumer product aimed at people who "just want to make movies" without having to learn about all the messy details of video processing.
In a nutshell, there are two basic things happening when you enable 2 hours movies in iDVD. First, the minimum bitrate is dropped to allow for the longer video. I don't know if iDVD uses a constant bit rate (CBR) or variable bit rate (VBR) but it works out the same either way. The catch with lowering the bitrate is that it means the number of bits allocated to each frame is reduced. Fewer bits = less data. Less data = lower quality. The second thing that happens is the quality setting is locked at maximum to compensate for the lower bitrate.
Here's where the "quality" setting comes in. If you're encoding at a rate of 5000 bits per second, 20 minutes of video takes up the same amount of space no matter what your quality setting is. The quality setting determines how much effort goes into filling the available space. The more time spent processing each frame, the better it will look.
These two settings are related. A video rendered at 3000 bits/sec at low quality will look worse than a video rendered at 8000 bits/sec at low quality. Similarly, a video rendered at 3000 bits/sec at low quality will look worse than a video rendered at 3000 bits/sec at highest quality. It's a tradeoff. Which is more important? Space or time? If you've got a short video, crank up the bitrate and drop the quality. If you've got a long video, drop the bitrate and crank up the quality. In theory, you get a similar product with either configuration. Of course, you get the best product using the highest possible bitrate and the highest possible quality setting.
Apple has apparently decided that they don't want people to be able to drop both the bitrate and the quality at the same time. Probably figure too many people will complain about the results and tell people that iDVD is an inferior product.
To compensate for the reduced bitrate, iDVD forces you to use the highest quality encoding when putting 2 hours of video on a DVD.
As for the 60 minute video question, the answer depends on how "smart" iDVD is and what settings are hidden behind the performance/quality settings as well as your source video. There are many formats out there and only one (with a few variations) works on a DVD. You can't just throw a 60 minute .MOV file onto a DVD. It must be converted to the proper format. The quality setting will determine how good the output looks. Just about any video you drop into iDVD will need to be reprocessed in some way. The bitrate and quality settings determine how it will look wither it's 5 minutes of video or 120.