At last. After many trials, and still more tribulations, I had everything I would need to gain entry to Rhith - the fabled gnomish city of illusion.
In a quaint forest clearing, precisely where I am under oath not to divulge, I proceeded with the spells, rituals and pass phrases required to enter the city. Even then, had I not a friend from the city to vouch on my behalf it would all have been for nought. Fortunate for me, I had such a friend, and so, upon unlocking the final barrier the forest at the edge of the clearing blurred into a smear of greens and browns and dribbled away into the ground. The light around me seemed to change, and when I looked up I found the sun to be a set of concentric circles in the colours of the rainbow. Slowly at first, but with increasing speed, it expanded to fill the sky, the circles blending and morphing into a shifting mix of every colour imaginable. As bewildering a spectacle as this was, my attention was drawn back down to earth by a tug at my sleeve.
Looking down, I noticed the diminutive figure of a gnome beside me. Behind him, I noted that the knee high light green grass of the clearing was gone, replaced by short trimmed grass of which every blade was a different colour. The gnome grinned and held out his hand.
From a pocket I drew the token my gnome friend had given me and placed it upon the palm of my new acquaintance. He glanced at the coin and then, to my surprise, bit it in two. After a moment of chewing he remarked, "Delicious.", before popping the other half of the coin into his mouth. Grinning again, he spread his arms wide. "Welcome to Rhith, friend." he proclaimed, and then bowed low. I began to respond, but stopped short as he, and everything around me, blurred into the same dazzling mix of colours as the sky above only to reform into the most amazing landscape I have ever beheld.
It began with the sky. A perfect blue, blemished only by what I at first took to be clouds of various shapes and colours before realising they formed into words of the gnomish tongue that appeared to serve the function of the town crier. "Visit Gerbo's garden: every herb you've ever heard of, and especially those you haven't!” announced one. Another read, "Welcome to the new arrival. He's a human - even if he doesn't look it." I suppose I shouldn't have expected my attempt to disguise myself as a gnome to fool anyone here. There were other cloud messages, but as the sky shifted through gradations of blue into a light purple, a distant point of yellow light zipping by caught my attention.
It moved rapidly across the sky before descending to the top of what I will call a tower, but only because a better word escapes me, and then spiralled downwards around the outer wall. The tower itself was long, slender, comprised of turning cogs of various sizes and coloured in shades of garish green, thrusting upwards at an impossible angle. I followed the light as it wound down around the tower, eventually disappearing into a window on the small structure that stood below it on the banks of a river of gold. A moment later, a green light flew back out of the window, wound its way back up the length of the tower before taking flight across the sky. Before I could make sense of this I felt the ground move beneath me.
I thrust my arms out and crouched slightly to stabilise myself. Lowering my gaze, I found that I was flying through the air on a translucent pink platform about ten feet across. As the platform picked up speed I felt myself becoming overwhelmed by the barrage of sights, sounds and smells that assailed me.
From my vantage point as the platform began its descent I could see that the city appeared to be ringed by trees that would have seemed normal if not for their impossible size. On my left a squat and featureless orange structure shimmered like a mirage, then a tower festooned with windows spun slowly by - inside some windows I could make out gnomes dining at regally set tables and I smelled a peculiar mix of tasty delicacies and unfamiliar spices. On my right a series of successive water falls fell up, springing from the river of gold that ran across the city, each fall a different colour from the last, at the top flowing into a fountain in front of a simple cottage held aloft by air elementals. I glanced back to see a sight that almost defied belief, even here: a gargantuan full colour statue that I recognised to be Garl Glittergold, wearing a grin so life like I was not at all surprised when he winked at me. Around the feet of the trickster god I saw figures making their way in and out of doors in his shoes. My eyes followed the figures moving out into a teeming flow of people - barely could I hear the distant murmur of their collective discussions - along a street lined with shop fronts sporting signs that were illuminated or flashed or hovered unattached. "Hallo!" someone called, and I turned back to the front to see a gnome flying towards me, attired in robes of red and gold that flapped in the wind, puffing blue smoke that trailed behind him from a short pipe. He waved as he flew past me in the direction of a galley ship that hovered several hundred feet off the ground.
How much of this was real, I wondered. Any of it? Indeed, I questioned if I was actually in the city of Rhith at all, or if I had merely succumbed to a glamour intended to keep me at bay. The platform veered gently to my right and descended further still.
It came to a halt before the upper storey walls of a house that was simple in structure, but appeared to be constructed from a patchwork of gemstones of every variety, dappling the light that shone forth from within. I caught the mouth-watering scent of home cooking. Just as I began to ask myself why the platform had stopped here, the gemstones in a small patch of the wall began to disappear in a circular pattern, each with a faint popping sound, until a doorway had formed before me. In the doorway stood my good friend, Donella Sparklegem, smiling warmly.
“Ah, there you are, my dear. I was beginning to think you'd gotten lost. Please, do come in – you’re just in time for tea. But first, drop that ridiculous illusion: I don’t believe I’ve ever laid eyes on a more outlandish looking gnome!”
This doesn't answer all of your questions, but it's what sprung to mind when you mentioned a gnomish city of illusion (great idea, by the way).
The fantastic stuff would be a mix of mundane with illusion layered over the top, or illusory shadowstuff formed into an almost reality - to some degree the amount of unreality you can create or afford may play a role in the social hierarhcy of such a society. Similarly for functionality there could be a mix of jazzed up mundane and pure magic. I imagine the architecture as being very inconsistent, as individual gnomes bring their own ideas on aesthetics and mechanics into play, bounded only by their ability with or access to magical means - a chaotic mix of form follows function and vice versa. It might even be a city that exists in the Fey realm, or some odd place with one foot in the Material and one in the Fey, or sits in its own demiplane somewhere.
For such a magical environment a magocracy of some kind would seem appropriate, particularly if a lot of the infrastructure is magical in nature. Order could be handled by conjured illusory enforcers and/or constructs, with oversight from a magical constabulary; magic would also feature heavily in the justice system, as this is one area where deception and illusions would need to be restricted (as tempting as it would be to suggest a system where the best legal defence is a great illusion, it's hard to foresee anything but chaos ensuing).
The easiest way for the PCs to function there might be to have a local contact of some kind to give them their bearings as it's likely to be a pretty alien environment as it is. On the whole I imagine gnomes being a pretty honest folk, although there'd certainly be some who'd try to take advantage of the tourists - this is where a friend could give them a friendly tip to keep their wits about them while at a tavern or shopping in the bizarre, and so on. Besides that, it's the kind of place you probably wouldn't want to go unless you have a reasonable amount of magical competency of your own just to get by and to be able to see what is really going on; this may even be enforced as a consequence of the means of entry.
