We study the relationship between galaxy luminosity, color, and environment in a cosmological simulation of galaxy formation. Using a simple prescription to assign colors and luminosities to simulated galaxies, we compare the predicted relationship with that observed for SDSS galaxies and find that the model successfully predicts most of the qualitative features seen in the data, but also shows some interesting differences. Specifically, the simulation predicts that the local density around bright red galaxies is a strong increasing function of luminosity, but does not depend much on color at fixed luminosity. Moreover, we show that these trends are due to central galaxies in dark matter halos whose baryonic masses correlate strongly with halo mass. The simulation also predicts that the local density around blue galaxies is a strong increasing function of color, but does not depend much on luminosity at fixed color. We show that these trends are due to satellite galaxies in halos whose stellar ages correlate with halo mass. Finally, the simulation fails to predict the luminosity dependence of environments observed around low-luminosity red galaxies. However, we show that this is most likely due to the simulation's limited resolution. A study of a higher resolution, smaller volume simulation suggests that this dependence is caused by the fact that all low-luminosity red galaxies are satellites in massive halos, whereas intermediate-luminosity red galaxies are a mixture of satellites in massive halos, and central galaxies in less massive halos.