As aliEnRIK says, it comes down to the native resolution of your set and quality of the scaler in the TV - the one in mine (an older Panasonic) seems to be pretty woeful in that I find the picture is better when the PS3 upscales to 1080p rather than 720p even though it is also an HD Ready TV, not Full HD. I put this down to the native resolution of 768 lines, thus with 720p, the TV is upscaling again to fit the 768 lines, whereas with 1080p, the TV is downscaling which it appears to be able to do much better. Leaving at 576p and letting the TV upscale gives an awful picture! So there's no right or wrong answer, just try them all and go with the one you prefer.
For the other upscaling settings, I use Normal for the BD / DVD Upscaler setting as this doesn't mess around with the picture other than upscaling it unlike the other settings which I prefer. Again though, use the setting you prefer - there's no right or wrong answer.