midrash - How did the moon shrink?

The Bavli, Chulin 60:2, says (in my own loose translation):

Rabbi Shim'on ben Pazi noted a contradiction: [B'reshis 1:16] says, "God made the two big luminaries" and "the big luminary… and the small luminary".

The moon said to God: "Master of the world, is it possible for two kings to use one crown?"

He told her: "Go diminish yourself."

She told him: "Master of the world, because I said something proper to you I have to diminish myself?"

He told her: "Go and rule [=shine] by day and night."

(And the conversation continued further.)

Presumably this midrash is not meant literally. (Moons don't talk, for one thing.) But my question will assume it's literal. In other words, my question will be about the storyline of the midrash, assuming its premise.

My question is: In what sense was the moon diminished? Here are the two most reasonable possibilities I can see:

• The sun and moon were the same size (say, a million kilometers' diameter, like the sun is now), and the moon shrank to the 3500 kilometers' diameter it is now.


• The sun and moon were the same apparent size as viewed from earth (same angular diameter) — as they are in fact now! — and the moon shrank in the sense that now it wanes.