There's a massive gap between emulating lifelike and actually being lifelike. You don't need a supercomputer that is able to simulate every individual neuron in the brain in order to have a sufficiently convincing NPC.
AI development in video games is all about superficially simulating human behavior through shortcuts. If you've ever played Oblivion, which was released in 2006, you may have noticed that each individual NPC has a "life". They have a designated home where they sleep during the night. In the morning, they eat breakfast, then leave their home and go to wherever they work. You can actually follow them around all day and watch them do their normal everyday tasks. That's already a lot of detail into making an NPC realistic that most gamers won't even notice, and it was done with 2006 technology.
Of course, that represents scripted behavior. It's a big step in making a believable NPC, but the player doesn't really interact with it. You also need interactivity. Many emotional responses can be simulated with simple triggers. For example, in the VR minigame Star Wars: Trials on Tatooine, if you wave your lightsaber towards R2, he squeals and backs away from you. It feels like a very natural and realistic reaction, though of course it's nothing more than a scripted response that is triggered when the lightsaber is within a certain distance of him.
The trickiest part of natural interaction would be conversation. Speech recognition and conversational AI is one of leading areas of technological development right now. Virtual assistants like Siri and Alexa are striving towards natural language without actually simulating the individual neurons in a brain.
As you pointed out, trying to simulate human behavior at the neurological level is not a cost-effective solution for implementing NPCs. What you would see instead is a complex set of scripted behaviors which do a good job of emulating human behavior without actually simulating a human brain. At the rate that relevant technology is progressing, you can probably expect to have reasonably life-like interactions with NPCs in the next decade.
Lastly, MMOs tend to heavily promote the multiplayer, social aspects of the game. I would think that not being able to tell the difference between an NPC and a real person would creep a lot of players out. If you managed to get the NPCs to perfectly simulate a rational human being, gamers would probably start running around nude while making phallic gestures with their broadswords, chanting lines from Monty Python, just so they could tell each other apart from the AI.