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I think the purpose of the exercise is to try and be efficient at at using texture space, etc.
When I was working on a PS2 game, and at first i found it a struggle to work with 64, 128 and 256 size textures, but it was good practice to try and fit as much detail as possible in the minimal texture space you have.
Because it's easy to use a 1024 x 1024 texture as you have plenty of room to work. The real skill is is trying to create a just as good texture in a smaller space. It all depends on what it is you're texturing as well, if it's not important to the game, or is just a small generic item, etc, you could probably use a smaller texture than you would do for say a weapon of a bigger scene prop.
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