Following the rumors of the iPad Mini, A.T. Faust at AppAdvice makes a good argument why 7.85 inch would be a good size for an iPad.

But keeping the same resolution of 1024 x 768 and shrinking the screen size by 20% would have a negative effect on the effective touch surface area. Interface elements like buttons would become to small to touch. Apple's Human Interface Guidelines recommends a minimum touch surface area of 44 x 44 points, 88 x 88 points for the newer generation iOS devices with a higher pixel density.

But how many inches of the screen should your finger cover to interact with the interface? The math says, 0.33 inches for iPads:

iPad 1st/2nd generation: 44 points / 132 ppi = 0.33 inch
iPad 3rd generation: 88 points / 264 ppi = 0.33 inch

And 0.27 inches for the iPhones, regardless of the higher pixel density on the newer models:

iPhone 4/4S: 88 points / 326 ppi = 0.27 inch
iPhone 2G/3G/3GS: 44 points / 163 ppi = 0.27 inch

So if the iPad Mini would have a 7.85 inch screen with a resolution of 1024 x 768 pixels it would have a touch surface area equivalent to an iPhone 3GS:

iPad Mini: 44 points / 163 ppi = 0.27 inch

This makes the rumored iPad size at least more plausible because it follows Apple's Human Interface Guidelines.

But I'm still sceptical. Apple has been upgrading all of its iOS devices with higher ppi displays since the iPhone 4, followed by the iPod Touch and now the 3rd generation iPad. Even OS X, with Mountain Lion, is headed to support high ppi displays.

Releasing a new iPad with old technology doesn't make a whole lot of sense to me. Apple is notorious for moving forwards regarding technology, not backwards, but who knows.