What do apps designed for small screens look like on tablets? Do they get scaled or do they just occupy part of the screen? I mean apps that were designed for 4-5" phones running on 8-10" tablets.

UPDATE: Let me give some details to better explain my question. Given the application developer has provided one layout only (for small devices) and the app is being run on a large display. Scaling may will look terrible (especially if the scale factor is in range 2-3), because it was not designed for this, so maybe a better solution is to show a smaller version of the app in the middle of the screen. Then it will look as designed, except that it will make poor usage of the available space. However, scaling it a little bit should be fine (scale factor in range 0.8-1.5), so that the app occupies entire screen. The question is what Android is doing? Does it scale the app even if it's scaled by a large factor (over 2) or will it stop at some factor and simply place smaller version of the app in the middle of the screen?
It depends on how the app was designed.  Android provides means to allow an app to choose from multiple layouts automatically depending on screen size and density, so if the designer cared to, they could provide completely different app appearances for phones and tablets to suit their app to the screen size.

Further information on the tools the developers may have used can be found here.

If they didn't do any of that, then the Screen Compatibility Mode kicks in and its behaviour depends on the version.  In version 3.1 and earlier, if the screen is larger than the app is intended for, it will occupy only part of the screen.  In 3.2 and later, it will expand to fill the screen.