How can I use avrsim to simulate Arduino?
While I haven't use a hardware simulator for a while, it think what s happen is something like this.

Each clock cycle of the AVR is simulated which takes multiple clock cycles on the host PC. Hence time on the simulated AVR is running slower than real time. This could explain why the delay loop would appear to hang the AVR simulator.

A similar scenario could be the case with the serial port.

Personally, I'm not sure if the simulating modern processors with flash memory is productive as it's quicker to just load the program into the system and "let it run" to see what happens.