Easy enough
Apple could easily take the iPod touch and scale it up from 3.5" to 7". Larger battery, larger screen, same innards, same resolution, same software. 960x640 on 7" is still a higher pixel density than the 10" iPad with 1024x768. There're plenty of apps running on that "retina" resolution and even if the UI elements would appear much larger than on the iPhone or iPod touch it would be perfectly usable. And cheap, because just a larger screen with the same amount of pixels and a larger battery with a new case aren't that expensive. With the iPod touch at $199 you could sell this with a similar margin for $249 or less.
On the other hand scaling the 10" iPad down with a smaller screen and battery wouldn't make it much cheaper and all the UI elements in the apps would shrink to nearly unusable absolute sizes. Idiotic idea, actually.
But Apple is between a rock and a hard place here. An iPad mini would be easy and would sell not too bad, but it would very much look like the start of what nearly doomed Apple the last time: Sprawling products to cover a market at all angles.
I'm sure they have production-quality prototypes of both approaches, but I'm also sure they will wait this out for a while.