A
low flap setting for take-off implies a need to optimise climb performance at
the expense of runway distance so you'd be looking for a climb limiting
scenario which could be either hot and high (climb limited) or obstacles
(obstacle limited) but with a long runway.
Using that argument alone either of your answers could be correct. I think what
knocks out the second answer is the fact that the obstacles are described as
'close in'. If they really are close in you would probably be
better off taking more flap and getting airborne earlier, albeit with a daggier
climb gradient. (see below)