What are we really trying to replicate?

I agree with your basic point. Few things irritate me more than attending a "live concert" and instead hearing the PA system, which is certainly inferior to my home system in all aspects but ultimate sound pressure levels.
Acoustic instruments are the result of centuries of evolution and refinement, and as previously noted, are impossible to reproduce. I applaud the "unplugged" movement in popular music. Unfortunately, however, PA amplification has intruded into many traditional acoustic music presentations, like opera and folk music. This robs the audience, especially the young audience, of discovering the difference.

(1) At what point does the level of an audio system exceed the level at which it was recorded and/or transferred to media?
I think the answer is simple, if you are looking at it incrementally you stop improving your audio system when the improvements stop adding to the enjoyment of the recorded music you listen too.

I've come to a very simplistic conclusion on this and it's that somehow the ear and brain knows when the music being played through a system sounds musically right and engaging. If your system does this, what else is there to strive for? There will always be recordings, as well as live concerts that just suck! I think in a good system, a studio recording should sound like you are listening to the music the way it was recorded in the studio and not how it sounded in an arena or stadium. Let's not forget that we don't close our eyes at live concerts, so the brain is also impacted visually. With all of the possible variables, it's up to you to either simplify or complicate
the matter. Watching a baseball game on TV can never be the same as being at the game, same thing for this striving for an Absolute Sound!

Watching a baseball game at home is much better because it can be turned off!

I should try to clarify that I'm not saying that a system can sound "too good" in the sense that I don't think people should even want better system, just that at some point we're investing more into playing something than was put in to produce it. Think of it as putting a doodle sketch in a 1,000 frame. Would it be worth it? Only if your kid drew it.

I'm not judging anyone for spending a ton on audio, I would happily spend more if I could justify it.

Have you ever had a bunch of people for a "music party" to specifically listen to an artist as though it was a concert at home? This could be either a true audiophile event in your audio room or an outdoor blast session.

Since I've had my speakers, I've had a few friends over several times to just sit on the couch and relax listening to music. It's an enjoyable time to be sure.

I should try to clarify that I'm not saying that a system can sound "too good" in the sense that I don't think people should even want better system, just that at some point we're investing more into playing something than was put in to produce it. Think of it as putting a doodle sketch in a 1,000 frame. Would it be worth it? Only if your kid drew it.

OK, this is pretty silly. It's either important enough to you to invest X$ into, or it is not. It's that simple. You could question the value of virtually anything that way. It's worth what you are willing to pay for it and that varies from person to person. I cannot afford to have Joss Stone perform in my living room whenever I'm in the mood to hear her. The illusion created by my system, to me, is remarkable, and well worth the investment. It's the next best thing to her being here....and way less expensive. I think my system cost much less than it cost to produce her last album as well. I have over 1000 other albums to listen to in my library at the push of a button, not just one. I don't think anyone's system here exceeds what it cost to produce even 1/10th of them. If someone's system does cost that much, so what? It's their passion and they have the means and dedication to invest in it. Arguably, this is all we get and it's pretty brief and fragile. What's not to get about pursuing a passion that gives one pleasure?

I don't get The doodle sketch metaphor. A frame is not an essential part of a doodle sketch. One can view it without any frame at all, and the frame does not add or subtract or change the actual sketch in any way, whereas the music played at home could not exist without the system it is played on - it would be so many various useless plastic discs. If you want to use that metaphor it would be closer to painting your listening room another color to alter your experience of listening in it. The sentimental attachment to a sketch your kid drew...well, what the heck does it have to do with your question?? Are you suggesting that the music we listen to at home is akin to a doodle sketch? If so, I don't even remotely agree.

Listening to music for me is a rather private enjoyment. I've shared it with friends who appreciate it, but I mostly enjoy it on my own. I imagine that everyone has their own ways of enjoying it. Not many folks I know are like me and actually like to spend time just sitting and listening, much less also share my particular tastes in what to listen to.