Typically both should be selected for a 720p TV, but you'll find just about everything will use the 720p resolution, such as DVD's (480p) which are upscaled by the PS3 to the maximum resolution (720p, in your case).
I have 1080p if supported if not the source will play at whatever it supports. Some games are 720p and will display in 720p some are 1080p and will basically display what is supported. 480i dvd's will be upscaled 1080i or 720p if your display supports it. Like said just select 720p and that will be your highest supported resolution.
Uncheck everything except 480p and 720p, even if your TV supports 1080i. Interlaced relosutions do not work well for gaming.
thats very subjective
Sure, I supose it is. The OP asked for an opinion and that's what I offered. I think it's reasonable to sacrafice video resolution to improve proformance.