'm eager to hear other theories with more explanatory power.
I don't know about more explanatory power, but here's another theory for you:  Consciousness doesn't really exist, at least not as far as we know.  What we perceive as our own consciousness is just a result of the effort of one part of our brain to generate explanations for the results of computations by another part of our brain. The process of generating explanations requires a little bit of recursive analysis that looks like introspection and self-awareness, except that nearly all of what it's allegedly introspecting is actually completely opaque to the computation that generates the explanations. Note also that there needn't be any actual correlation between the generated explanations and the computation that is being explained (there's actually pretty good empirical evidence that our explanatory systems are just as good at explaining something we actually disagree with as something we decided, BTW).
Now, why did we evolve such an explanation engine? Because it was adaptive for a communal species, of course, especially when coupled with another ability that co-evolved with it: Rich, detailed communication (speech, and more). We developed the explanation engine so we could use the explanations to convince others in our community that our unexplained computation results (decisions, actions, etc.) are better than theirs. This development was both communally adaptive, because battling explanation engines (people arguing with each other) actually result in the construction of better joint computations, enabling the community to make better collective decisions and thrive, and individually adaptive because the better explainer is able to get their way more often and increase their status within the community.
So, within this theory, your questions are all pretty easily answered:  (1) Consciousness is just an illusion that arises from the layered structure of our brains, which are, indeed, purely physical objects, though incredibly sophisticated. (2) This apparent consciousness and the logic circuitry that underpins/enables it closely matches evolutionary adaptiveness because it is actually an evolutionary process:  The explanatory engine operates by generating, testing and selecting postulates, just as evolution operates by generating, testing and selection genotypes.  (3) Consciousness is illusory so the question of where to draw the line doesn't make sense, but you can also clearly see that rocks don't have anything that might appear to be consciousness because are no computational processes going on in them.  Cities might, however, especially when you note that human cities contain institutions that both compute (make decisions) and attempt to explain those computations, but we'd really need a much more precise definition of "consciousness" to attempt to answer this question. Such a definition is impossible, however, because consciousness is just an illusion anyway.