I would love a 7" iPad - it would go straight in the car. 7" is the size of the double DIN head units. Some have done this already with the standard iPad, but it is pretty big. 7" would be fit in much better.
I don't see apple having much reason to release 7 inch model. It's not going to be much cheaper than 9.7inch in manufacturing cost. So, all they get is more split in market...