The question should be: Does an ~8" iPad make sense?
I say: No.
I'd say yes. I know quite a few people (mostly older women, admittedly) who think the iPad is a little too large and heavy. Most of them would prefer the Kindle Fire simply for it's size.
So yeah, it'd make sense to release a slightly smaller iPad. Apple could cover the whole range this way. The smaller iPod for music and chat specifics, the iPhone as a communications/3G device, the 7.8 inch iPad for people wanting a lighter iPad specifically for media consumption, and the current 10 inch iPad for...well...what we all use the iPad for now. They'd cover all the bases, and it wouldn't cut into any of their other demographics.