I love SID tunes, but I'm glad that the Amiga had Paula. A full speed C64 emulator with decent compatibility on a 68000 Amiga is impossible..
Paula and SID both are possible without too much overlap in functionality. It is very easy to throw an FPGA SID (or 2) in an FPGA Amiga motherboard now days if it would sound acceptable as all digital. SID in an Amiga back then would have probably required lowering the voltage more but that was happening with later revisions of the C64 anyway.
I believe the 68000 could have emulated the 6502/6510 CPU o.k. but the chipset emulation would have been difficult at full speed. The Amiga has its custom chips to offload the 68000 so maybe it would have been good enough. Perhaps the biggest hurdle at that time was the buggy AmigaOS. Different size and capacity of floppy drives didn't help either.
The C64 lived on for another 7 years, so there was definitely a market for an 8 bit computer. The C128 just turned out too expensive and not enough people cared about C128 or CPM mode.
I would have continued to manufacture the C64 until demand dropped too much. Developing and marketing the C128 was a waste of resources which could have been used for the Amiga.