The idea of using the AR flag in MKV is to avoid that any kind of resizing filter is being used during the encoding process, as its known that resizing filters introduce a lot of noise on the temporal axis, putting extra stress on the encoder. This way you can preserve the full resolution of the DVD source, especially in vertical direction, with only a marginally higher bitrate compared to the extra resolution you gain.
In my tests with a typical 1:2,35 video ( Star Wars - Phantom Menace ), these were the results when encoding a part of the movie with a fixed quantizer :
720 x 576 ( full picture, uncropped ) : 124 %
720 x 432 ( cropped ) : 122 %
720 x 304 ( cropped and resized ) : 100 %
As you can clearly see, with only a 22% higher bitrate, you will achieve a 42% higher vertical resolution, and as one member was pointing out above, this is where the human eye is more sensitive.
If you do this, you should set the playback AR to 1024 x 432, to make sure your movie will play with the right aspect ratio ( 1 : 2,35 ).
2 Other things are important :
1. Even though most MPEG4 encoders today will allow to use other resolutions, sticking to the MOD 16 rule will improve encoder performance significantly. 720 x 432 fulfil this rule.
2. However, in any case you have to avoid that there is some rest pixels of the black bars remaining on top and bottom of the video ( after cropping, remember you DONT use any resizing filter or the numbers above are NOT valid anymore ), so to fulfil MOD 16 or at least MOD 8 rule, dont hesitate to crop a couple of lines into the picture. Nobody will notice if 3 or 5 of 432 lines are missing, i swear

....
Christian
matroska project admin
http://www.matroska.org