Perhaps an alternate translation could've been provided in addition to the one given, so that the context of the excercise was clear.

Otherwise, one might come up with (such as I did, and admittedly missing the point of the excercise): "Oui, mais c'est grand dans mon garage." ... pointing out that a car of such small size would actually appear big in a garage that's just as small.

From "C'est petit dans mon garage," I get the impression that it should be: "Your car is so small. - Yes, it's small even in my garage (which, by the way, doesn't have much room to begin with)."

I picked up on this issue also.  I thought the desired French translation could have  been:  "Oui, mais mon garage est petit."  But that would miss the point of the use of C'est.

If the English was given as 'There isn't much room in my garage'  or "It (my garage) is small"  I might not have been prompted to question it.  :)

Nonetheless, I learned something useful.  :)