What happens, exactly, when an iPhone app is run on an iPad at 2x scale?
I haven't found a detailed list of the exact behaviors. For the most part, it seems that everything is simply pixel-scaled (which is why text looks bad), except for images which were scaled down to begin with. I presume that the UIImageView class has some behavior to handle this automatically.

On Retina devices, Apple's built-in text and image rendering are aware of the scaling factor of the screen, and will render text and photos in high quality. But this doesn't seem to apply to iPhone apps run on an iPad. (See Apple's developer documentation on high-resolution screens for more information on that.)