Option 1- it feels unnatural to have an input field in a dropdown.
Option 2- it feels awkward to create set that then autopopulates the dropdown
Showing an input in dropdown seems to be OK for me, it could be a search for example, so I don't see any problem with input there. Here is Google Mail screenshot:
The above menu also has a "create new" link that opens a new modal dialog, which allows you to select a parent label for the new item. But in your case (it sems like there is no additional settings) it seems like you may simply add an input without a link at all, so you will save at least one click:
In addition to @alexeypegov's example, option B expects the users to learn a new abstract concept ("a set") and then to understand that pressing this button will add an item to the dropdown. Basically it makes them deal with data management. In contrast, the first option indicates very clearly that there's a list of items and the link below lets you add an item to the list. While technically achieving the same goal, the whole data management aspect is much more transparent in this case.
It would be better to have both the options separate instead of having them together. Let the dropdown do what it needs to do - selection. Let the call to action of 'Create new set', create a new set. When a new set is created just display that a new set has been created to user so that he knows that the dropdown will have the new set .