Of course you can. They did it with the iPhone 5 and they did it with the iPad Mini. It's not at all out the realm for them to scale iOS to a 4.8 or 5" display.
Or let me put it to you a better way, if they can't when Android can, guess who is going to lose in the long run? Because when I saw a non-geeky "female" co-worker with a Galaxy Note II last week that she just loves, it really proved to me that larger phones are selling because people do want them. Not everyone lives and breaths Apple. Even my own brand loyalty is starting to fade with all Apples patent BS and Android improvements going on.
No, they didn't. They increased the vertical pixels and as a result updated their UI to take advantage of the new resolution and updated the SDK so that apps can be tailored to the new size. The iPad mini uses the same aspect ratio and resolution of the iPad 2. You cannot simply have disparate aspect ratios, resolutions and sizes on a touch-based, non-windowed OS and expect it to carry over with the same usability like with a windowed desktop OS. This is not something you can debate.