During DB2 installation, creating an instance is crucial for database administration. An instance represents a single DB2 environment on a server, including its associated databases, configuration settings, and resources. It facilitates resource allocation, security management, and isolation of databases within the DB2 system. 

The SELECT statement in SQL is primarily used to retrieve information or data from one or more tables in a database. It allows you to specify which fields or columns you want to retrieve. 

ODBC (Open Database Connectivity) in DB2 integration serves the purpose of simplifying the process of connecting to DB2 from various applications. It provides a standardized API (Application Programming Interface) for applications to communicate with different database management systems, including DB2. This allows developers to write applications that can interact with DB2 without needing to know the specifics of DB2's internal workings. ODBC also provides tools and utilities for managing database connections and executing SQL queries efficiently. 

Option 2: Type. In DB2, a tag specifies the type of a database object. It categorizes the object according to its purpose or functionality, aiding in the organization and management of database structures. 

IBM Data Studio is a comprehensive tool commonly used for monitoring database performance in DB2. It provides features for monitoring and tuning SQL statements, analyzing performance metrics, and diagnosing issues to ensure optimal database operation. 

Transaction management in DB2 is crucial for maintaining data integrity by ensuring that all database operations adhere to the ACID properties. It guarantees that transactions are executed atomically, meaning they either complete successfully or are rolled back entirely. Additionally, it ensures consistency by enforcing integrity constraints and isolation to prevent interference between concurrent transactions. Finally, transaction management ensures durability by persisting committed changes even in the event of system failures. 

In response to identified issues, the Health Monitor in DB2 may take actions such as automatically adjusting configuration settings, killing active transactions, notifying administrators, etc. 

Knowing the edition of DB2 is crucial for application developers as it determines the specific features and functionalities available. For instance, the Enterprise Edition may offer advanced features such as data compression or advanced analytics capabilities, which can significantly impact application design and development strategies. Understanding the edition ensures that developers can leverage the full potential of DB2 to meet their application requirements effectively. 

XML transformation in DB2 allows for the customization of XML output according to specific requirements. This process involves converting XML data from one format to another, applying various rules or templates during the transformation process. It enables users to tailor XML output according to their needs, such as rearranging elements, adding or removing attributes, and applying styling or formatting. 

It specifies the version of XML being used. In DB2, the XML Declaration serves to specify the version of XML being used in the document. This declaration is crucial for ensuring compatibility and proper parsing of the XML data, as different XML versions may have varying syntax and features.