You've been to dell to install the driver for that laptop's video as well as it's display? If so, supply link and version numbers so I can check the work.
If all that is done then there were older models that did just what you noted and "it is supposed to work that way."
I am working on a friends Dell laptop, and he said that "everything is too small." Easy fix right? I tried to bring down the screen resolution, but instead of the screen elements becoming larger, the display area became smaller. So I have the desktop centered in the middle of the screen with a black border around it. I tried updating the driver, but the file I downloaded from dell fails at the install point (extracts, goes through the EULA, etc.) and when I try installing manually via the device manager, but that also fails. I am open for suggestions. System specs below.
Dell Latitude C600
Windows XP, SP2
256 MB RAM
ATI Mobility 128 AGP 2X (Dell)