I would prefer a 7 inch iPad over the regular iPad to be honest (Personal Opinion) I use my girlfriends iPad a lot, and when I do it is for reading news articles through flipboard or reading magazines, which is what i would be using my own for when I eventually purchase one. However, I think this would be more comfortable on a 7 Inch screen. If i really want to watch videos etc. on a bit of a bigger screen I can always switch across to my MBP, however, I still think 7.85 Inch would be plenty to watch YouTube videos on.
I agree with an argument that when apple released their iPad they brought something new to the market, somewhere between a smartphone and a laptop. Something that would bring something different to people, as with a lot of their devices. However, they do make an iPod Nano and a 13inch and 15inch MB.
Im still not 100% convinced this will happen, but if it does, Il certainly be queuing outside the apple store.