Basically, I followed your simplified logic (I made it too complicated), I calculated that a new French city is going to produce 3 culture per turn (assuming no rushed buildings) and calculated that against a percentage of total empire culture per turn. Once the percentage dipped below 10%, I noted that as the point of diminishing returns.
That is the correct way to calculate diminishing returns for an exponential increase in costs, but the increase is linear,
not exponential. The correct way to calculate the value of additional cities with a linear increase is to figure how much culture you could produce with only your capital (including city-states, religion, and puppets). When your city produces more than 10% of
that figure, it is a net asset to culture production. For the French example, every new city is
immediately helpful unless your capital alone can produce more than 30 culture per turn.
I'm not even sure it is possible to break even with additional cities. 1. Not only would you need all culture buildings ASAP, but filled specialist slots as well.
You don't need all of the culture buildings to exceed 10% of base culture production, as described above. Let's consider France in the early game. How much does it cost to adopt the 6th Liberty policy with varying numbers of cities, assuming you've already taken Representation?
Let's assume that the capital has a monument, amphitheater, and one specialist, but no wonders, puppets, or city state friends. Base culture is 2 (Ancien Regime) + 1 (Palace) + 1 (Liberty) + 2 (Monument) + 3 (Amphitheater) + 3 (Artist) = 12 culture per turn. The 6th policy with one city costs 255 culture, which takes 22 turns at that rate.
Three-city games are popular for cultural victories. With three cities, the 6th policy costs 305 culture. The second and third city add at least 3 culture each, for 18 total culture per turn. You will finish the policy in only 17 turns.
Most people would regard a ten-city empire as excessive for a cultural victory. With ten cities settled, the 6th policy costs 485 culture. But when you produce 39 culture per turn, it'll only take 13 turns! That's close to double the rate of using a single city.
The math changes once you reach a point where you could produce more than 30 culture per turn from your capital alone. Then again, monuments (and cathedrals) are very cheap, so you might want to figure the base culture for new cities at 5 per turn, 8 if you have a cathedral religion, 10 if you have cathedrals and the Sistine Chapel. It's quite far into the game before you could produce 100+ culture per turn from your capital alone, so rapid expansion makes a lot of sense as France.
More generally, there are three main concerns for empire size and culture:
- Will my capital ever reach a point where it produces so much culture that no city can beat the 10% penalty? If so, then eventually you reach the point Matthew. described, where it doesn't make sense to expand at all. However, because you can generate 36+ cpt from basic buildings alone, much more with religion and wonders, it's easy to pass the 10% mark even in the late game.
- Will it take so long to pass the 10% mark that my new cities will never pay for themselves? This is a more realistic concern in the late game. While even chump cities in an ICS game can eventually produce 36+ cpt, it might take a while, and the excess may be too little to pay for the set-up costs. If you have enough cash to fully develop new cities as you found them, this is not a problem.
- Can my new city pass the 10% at or very near to founding? This is the situation I describe in depth above, and it's quite possible for France. And if a city can beat the penalty at founding, it's very easy to maintain such that it continues to be a net asset.
So for a good general rule of culture and expansion, I would say that number of cities doesn't matter nearly as much as timing. At any point in the game where you can beat 10% of your capital culture right away, it pays to found as many cities as possible. At any point where you can buy yourself past the 10% penalty, it pays to found as many cities as you can afford the cash for culture buildings. After that, stop settling new cities and focus on development (or conquest) instead.
(Now I'm tempted to play a proof of concept game as France to demonstrate this.)