Final answer:
Option C is correct; "Max file compatibility" ensures PSD files are compatible with older versions of Photoshop. It does not compress the file or change its format but may increase its size to maintain compatibility.
Step-by-step explanation:
When saving a PSD file with the option "Max file compatibility" selected, it preserves compatibility with older versions of Photoshop. This feature includes a composite image saved within the PSD file, which allows previous versions of Photoshop or other programs that do not support all of the latest features to open and display the document, even though they may not be able to edit all aspects of it. It's important to note that this option can increase the file size because it's adding extra information to maintain that compatibility.
Compression, as described in the context of JPEG files, relates to the process of reducing file size by discarding certain information like redundant colors. However, saving max file compatibility in a PSD file does not compress the file nor does it change its format to JPEG. The primary purpose is to ensure that the PSD file remains usable across different versions of the program rather than reducing its size.