A couple things I think combine to make an 8" iPad make sense.
7.85" is the minimum size. It's smaller than an iPad, but as I'd figured before, as long as the screen is 7.85" in size or more, all the usual controls will be the same size as on the iPhone, so a very usable size. If it's the same 1024x768 resolution, every iPad app would run fine.
Cheaper. $299 or $399, it's less than a full size iPad, but smaller screen and less memory (8 or 16GB) so Apple would likely still sell at a good profit.
Where this all fits together is Education. Apple's recent push has been for iPad textbooks. This gives a cheaper model for schools to buy--$499 per student is a lot. I'm sure you'd get a deal as a school buying 100s or 1000s of the smaller iPads.
Steve Jobs famously said that smaller tablets should come with sandpaper to make your fingers smaller. But going younger in school--everybody DOES have smaller fingers. My nieces have been playing with iPhones since they were 5...the hard part would be keeping games off so they do homework instead.
(Apple was very smart and focused on High School to start--of course thinking ahead 4 or less years to when all those kids will be in college and would rather keep using an iPad for textbooks rather than switch back to a big pile of heavy books. The iPad8 goes the other direction, getting kids younger using them in school so they'd move up to a full size iPad when they hit High School.)