Thanks GeoffR and JSWolf. The images are specified with a height and width of 'auto' and are therefore displaying without scaling. When I scale up the images using either height (=1em) or width (=80%) they are pixellated but at least I don't have to hold my ereader up to my face to see them.
I do like the ImageMagick idea (I already use this before uploading photos to my website). I think that might be my next experiment.
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