Yes. That's practically what those machines were intended to do. And the 4GB of RAM it comes with should be plenty for normal Photoshop use plus some web browsing and email.
Now, if you are a serious Photoshop jockey I'd seriously consider bumping yourself up to the $1999 model for the better graphics chip and/or a little extra for a 7200RPM hard drive (the largest one you can afford--the faster the drive, the better Photoshop will be able to use it as a scratch disk).
The extra $50 for the matte screen on either model might also be a good investment, since it should result in slightly better color rendition.
Note, for reference, that in many cases you can buy and install your own hard drive for less than the cost of the built-to-order upgrade from Apple.