Debra,
The smaller unit will probably be fine, although if you are planning to spend a LOT of time in your rooms, the bigger unit will be more comfortable.
We, a family of 3 (and for part of the trip, a friend joined us to make it 4) stayed comfortably in the studio unit. There was a sleeping loft for my boys, which they loved. There are also 2 queen beds. It is a studio, so right next to the beds is a couch, which faces double glass sliding doors, which open onto a HUGE deck. Next to the couch is a dining table, and next to the table is the kitchen, which is small--a half sized fridge, a stovetop, oven, and dishwasher. The bathroom is plain, but adequate, and is just off the kitchen. The sleeping loft is located above the kitchen/bathroom.
The problems I can see you encountering depend a little upon the ages of your children. If they are tween-agers or older, privacy may be an issue. Also, there is only 1 TV in the unit, which can be a problem if you have a combination of night owls and early birds. If you can afford the bigger unit, I'd say go for it--the extra space is always appreciated. If you cannot, I wouldn't sweat it--you'll still have a great time!!
Susanne