That's a common question..
The room size control allows you to "shape" the frequency response of the subwoofer to optimize it's interaction with your room environment. The goal is so you can enjoy the exact type of bass quality you prefer.
The more you turn it to LARGE, the more powerful movies may sound to you. The more you turn it to SMALL, the tighter music may sound. There's no correct setting as it depends entirely on your room and your own listening preferences.
Don't expect grossly audible changes when adjusting the control. It's better to think of it as a "fine tuning" instrument.
Also, while on the subject.
GAIN: Start with it at about the midpoint. Let the AVR handle the calibration from there and adjust if needed during that process.
CROSSOVER: Turn it all the way up(clock wise). This bypasses the filter. The AVR is already applying a crossover to the signal going to the subwoofer and there's no need to filter the signal again(barring something very unusual).
TIME DELAY: Leave at 00. This is a control used to delay the output of the subwoofer in milliseconds to "time align" the bass with the output of the main speakers. The AVR's "distance setting" does the same thing. So you can let the AVR set that automatically. If you decide you want to experiment with the subwoofer's time alignment later just change the distance setting in the AVR. That can all be done via remote and it would be more convenient than changing the knobs on the sub.
Power Sound Audio