hello mike,
London (differs from) other cities, (such as) Paris and New York, (in that) its shopping areas are so (widely) spread out. (No error). i chose c because that refers to any of the three cities,
can u please explain. the answer is E

Yeah, there’s no error here. The phrase, “X differs from Y in that…” is fine. The “that” there is structural; it doesn’t refer to X or Y. It’s just part of the phrase.