She said: "No, you just think you're hot." I asked her to rate me 1-10; she said I was a 1. Would you talk to your incredibly nice boss, who pretty much let's you sit around, text, look at magazines, etc.. that way? I should fire her.
With all due respect, I think your question was a little unprofessional and inappropriate. You might have made her uncomfortable in some way and that is why she became defensive. I think you need to step back and put yourself in her shoes. Your boss asks you to rate him on a scale of 1-10...that is precarious and unsettling. I don't think there is a solid basis for dismissal. I think it's better to forget the whole incident and move on.
It's only my opinion but you do what is best in your mind & for the company.
You shouldnt be asking an employee that question anyway. It's inappropriate. Why do you let her sit around, text and look at magazines when she is supposed to be working? Why did you get so butthurt at her reply? Are you attracted/interested in her in some way and mad that she doesn't see you that way? If you fired her for that that wouldn't be smart on your end as you would open yourself from possible sexual harassment rumors