I think it would be irresponsible for Apple not to prototype an iPad model that could compete with the Kindle Fire and other, smaller tablets. However, I am at a loss for use-cases where the smaller screen would be preferable or compelling.
Although that might be a lack of imagination on my part; I would never dream about buying a Kindle.
On a workday, over 4 million people ride the New York City Subway system. The current iPad is just a little large for a straphanger to easily use one handed on a crowded train. I see a lot more Nooks, Kindles and Android tablets in those tight quarters. I also think an 8" tablet would fit in winter coat pockets, eliminating the need for a Man-Bag.
I think it will sell and is inevitable if only to satisfy Apple's need to make stuff smaller.