Why undigested plasmid lane should not be used to determine plasmid size?

I think it is because the undigested plasmid would still be in a circular shape

Aha!  That's an excellent question - your instructor is doing a good job.  There are a couple of factors involved but it boils down mostly to structure.  Running DNA across a gel involves the DNA fighting its way through a mesh-like physical barrier of interlocked proteins or the equivalent, right?  The smaller pieces move faster than the bigger pieces because it's easier for them to find a pathway through the mesh.  Now consider a plasmid.  It's a circular piece of DNA, right?  In terms of 'practical size', it's going to move though a gel differently when it is a loop than if it was cut and stretched out as a line.  It's not even that simple, either, because you remember that DNA has secondary structure, etc., right?  So the simple loop of a plasmid may be twisted up in the same way that you can take a wire loop and twist it so that it becomes 'super-coiled' and looks like a tightly-packed set of smaller loops.  This will make it run differently from a normal loop, too.