[super_mario]

The cost of simulating entire universe becomes increasingly expensive to the point you need a universe of energy to simulate a universe. Daniel Dennet in his "Consciousness Explained" makes a good argument why this is so.

Also there was some research done on the constraints on the universe as a numerical simulation

http://arxiv.org/abs/1210.1847

telling us that we can do experiments to detect if we are living in a simulation (but the simulators always have a freedom to "increase the resolution" of their simulation to thwart our efforts). The paper does not discuss if there are limits on how far this game can be played on either side.

[madaxe_again]

You don't need to simulate the entire universe in order to accurately simulate a causal chain - just the visible universe. Which is a lot smaller.

Hell, you could just simulate an individual and what they observe. For all I know, I'm talking to the AI in which I, and solely I, reside right now. Woo, simulation-solipsism.