Paginate WordPress Category Pages

paged is correct unless you’re using pretty permalinks, however, if you’re just trying to alter posts per page for categories, you should be using the pre_get_posts action, there’s no reason to use query_posts in the template:

function wpa85791_category_posts_per_page( $query ) {
    if ( $query->is_category() && $query->is_main_query() )
        $query->set( 'posts_per_page', 2 );
}
add_action( 'pre_get_posts', 'wpa85791_category_posts_per_page' );