It was unfortunately simply too late in the market to compete with the popular Dos 2 design, and due to the rather small sector size of the 1050 (Atari going cheap again with only 256 bytes of RAM in the drive) it had to merge 8 sectors into one cluster, which was wasteful. With 256 byte sectors - as the competitors had - clusters would have to be 2 sectors long, hence half the size (o one quarter of the number of sectors) which would have been much more reasonable.
But with 256 bytes per sector in MFM your disk would have 720 physical sectors, not 520. And 720 sectors cannot be covered with 256 clusters, 2 sectors each.
This was the main limitation of DOS 3 and DOS 4: these both were FAT-based, but it was FAT-8. Unless there is a method of extending the cluster address to more bits (which I am not aware of), every DOS 3 and DOS 4 installation is stuck at max. 256 clusters per disk in DD and max. 128 clusters per disk in SD/ED. This is why DOS 3 uses 8 sectors per cluster: 8*128*128 = 131072, which, provided that some areas of the diskette are used for system purposes (FAT, directory, boot region, such stuff) covers the entire possible data area for an ED floppy. And nothing more.
DOS 4 for the same reason is even more wasteful, it uses 1,5k clusters in DD (six 256-byte sectors per cluster) to cover a 360k disk.