So it seems that as you go down the list, Sony assumes you have support for all previous resolutions as well, and that the one you've selected is for all intents and purposes the "maximum". For example, if you select 1080i as your TVs max resolution, the console assumes you do not have 720p output and so will display 720p games in the next lowest, 480p.
It also seems that the PS3 will choose the "correct" resolution based on what you're using it for. For example, I have 720p as the max resolution my set can display (it's not a 1080p set ) and for games it will use 720p. But, when I stick a Blu-ray movie in, it switches to 1080i. Interesting to say the least. Anyway, it'll be interesting to see when FEAR comes out (a 1080i game) whether it will use the 1080i resolution in FEAR even if my max res is 720p, or whether it will default to 720p.
I'd just like to throw something I may have stumbled across out there, but I think that in the "PS3 heirarchy" of resolutions, you'll notice that the order is