The gauge listed is for the larger needles--the smaller needles are only for the ribbed edging.

CORRECTION to Lozenge Pattern:
(The is the same correction Catgirl9 made in the comments--Thanks Catgirl9!)

Row 15 should read: K8, yo, sl1, k2tog, psso, [yo, k7, yo, sl1, k2tog, psso] repeat bracketed portion, ending yo, k7, yo, sl1, k2tog.

This omits an YO but keeps the markers in place--if you want to YO, then you should SSK the 16th underarm stitch and the first stitch in the back, place the marker, and begin yo, k7, etc (but still end yo, k7, yo, sl1, k2tog)

From Knitty.com



Keep your arms and shoulders sparkly and warm or substitute a simpler yarn for everyday wear! This raglan shrug is knit from the bottom up, with a lacy back so the back of your dress or your back! can peek through.