This one should be pretty easy for a great deal of you.  In fact I'm
annoyed that I am unable to find it myself.  I'm just doing a little
question and answer paper of Beatrix Potter's, Peter Rabbit.  One of
the questions is "What are some ways in which the setting functions?" 
I have been trying to see if the phrase SETTING FUCNTIONS have some
sort of combinded meaning and have found no conclusive answer.  Does
it have something to do with the moral?  I'm not asking for an answer,
but merely your interpretation of the question.  If I know the
question I'm pretty sure I can answer it!!!  Comments on the story are
welcome, but not necessary.   Thanks all.  P.S. I have about 10 hours
to post this to our on-line instructor...so time is of the essense.

The "setting" is simply the place in which the events of the story
occur. In some works of fiction, the setting plays an important role
in establishing mood or in advancing the plot.

The question "What are some ways in which the setting functions?"
might be paraphrased as "What are some of the functions of the story's
location?"

Here is an example of an assignment which uses a similar phrase: "What
is the function of the setting in the story?"

"For this assignment, you will analyze a short story and argue about
its theme by focusing on one (or more) elements of that story. As you
are writing your essay, think about the connection between form and
content in your story. Focus on the way the elements of fiction, such
as recurring symbol, and unreliable narrator, the story? setting, or
the unusual atmosphere of the story, work to suggest the story?s
overall meaning...

Remember that in a literary analysis, you are looking at the parts of
the literary work so that you can better understand its overall
meaning or theme. Ask yourself the following questions:
a. What is the function of the setting in the story?
b. Why has this character been introduced? What is his or her role in the story?
c. What is the author trying to tell us?
d. How exactly can I describe the tone?" 

Writing Assignment #1: Analyzing Short Stories 
http://student.ccbcmd.edu/~achiarin/shortstory

So, as I interpret your teacher's question, the task is to discuss how
the rural setting of "The Tale of Peter Rabbit" influences the story
as a whole, and why the setting is an important element of Beatrix
Potter's fiction.

Google search strategy:

Google Web Search: "what is the function of the setting"
://www.google.com/search?hl=en&q=%22what+is+the+function+of+the+setting%22

Google Web Search: literature OR story "importance of the setting"
://www.google.com/search?hl=en&q=literature+OR+story+%22importance+of+the+setting%22

I hope this helps! If anything is unclear or incomplete, please
request clarification; I'll gladly offer further assistance before you
rate my answer.

Best regards,
pinkfreud

thank you very much!!