Final answer:
The theory suggesting that dreams serve to process daily activities and further work on those experiences is the Information processing theory.
Step-by-step explanation:
The function of dreaming is to provide a mental space in which the activity of the day can be processed. The correct answer to which theory posits this function is C) Information processing theory. This theory suggests that dreaming plays an important role in processing daily experiences and memory formation. Dreams might represent a state of proto-consciousness, as posited by Alan Hobson, with the ability to create a kind of virtual reality that assists with daytime experiences. Furthermore, lucid dreaming offers a unique opportunity to understand dreaming, being a state where wakefulness is partly maintained during dreams and individuals can manipulate the dream content.