[RedDevil]

Due to safety regulations you cannot make a car smaller without adding weight, actually.
The smaller the crumpling zones are, the sturdier they need to be, and the rest of the frame too to withstand the forces those crash zones pass through.

Lighter materials can compensate but then you'd make it more expensive. But most people would only buy a really small car if they can't afford to buy a bigger 'normal sized' one.

I bought my Insight because the space it offered is adequate to my needs. Even so I have to fight to get all the holiday stuff in and such. We sometimes leave out stuff we would have taken aboard if there was more space.
I would not even consider buying a 3rd gen Insight if it is going to be smaller inside.

The 2nd gen lost out to the Prius mainly because the Prius had much better EPA numbers. In practice the difference is not that big.
What Honda really needs to do is to make sure that the 3rd gen gets excellent EPA numbers and be cheaper than the Prius at the same size.

Only problem: that car already exists - the Hyundai Ionic.
Which looks more like the 2nd gen Insight than any other car...