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I use the Book Designer default margins and text size. I can read smaller text easily, but I find the default to be the most comfortable. It's a very subjective area.
Books are easier to read if you have large margins because your brain doesn't have to process the optical edge effects. This is true for paper as well, but electronic readers are generally worse because of the high edge contrast. Of course, generous margins means less text or smaller fonts, a sharp trade-off on 6" screens.
One way you might reduce this problem is to copy what PRS700 does on the 505. That is, use a piece of light gray plastic or paper and cut it so that it makes an edge all around the screen. Cover the inside edge of the blue/silver/red metal casing fully so that you get a visually continuous field without a high-frequency discontinuity.
The edge doesn't have to be e-ink (there is no text there), it just has to have the same background color. You can probably use a laser printer to get the right shade of gray (and print the cutting lines) and non-permanent glue to affix it to the reader. Laminating the paper is probably a good idea, although it will make the frame more reflective.
I haven't tried this yet so I can't say first hand how well it works. It certainly isn't as nice as having a larger screen in the first place, but I did like the effect on PRS-700.
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