OGR's friendly competitor, CTT, has an excellent article in the January, 2017 issue titled: "A knockout Marx display surfaces after 75 years." In the article, there is a beautiful recreation of a Marx display layout designed for the 1940 Holiday season. The compact layout in the display would make an excellent "stage" for playing trains with a 7 year old, or, an adult for that matter. The layout discusses model train "operations" in some detail, down to the required whistle signals by the engineer. Interestingly, my rebuilt layout (deleting duck-unders), which is a modified dog bone, has two end sections that are very similar to this Marx display layout, given the placement of sidings on each end of the layout.
On Saturday, I had a wonderful time playing trains with each of the three boys, ages 7, 5, and 2.7 years. I used many of the excellent suggestions in the posts in this thread. The 7 year old was conducting "operations" on the main line, delivering various items of Micheal's "craft wood" to different industries. I had created 3 X 5 cards with train "orders" as suggested above, and, reading the cards, he delivered loads of craft sticks ("lumber"), blocks of wood, spools, balls, etc. To simplify operations, I had also made up cardboard number signs for the pick-up and delivery points.
The 5 year old played with the new Lionel Dinosaur set for a while, lost interest after about 20 minutes, and occupied himself with the 20 or so new hot wheels cars on the Snow Village, cobblestone roadways. These roadways are located on the edges of the three sides of the center section of the layout, giving easy access for play. (These Hot Wheels cars replaced my 1/43 scale, 50's era, die-cast autos, including a stunning, gold-colored Tucker.)
The 2 year old was in his mom's lap, on a padded barstool, loading and unloading dinosaurs and eggs into the Lionel Dinosaur gondola. With a little guidance, he did quite a nice job operating the train with the remote. His mom had so much fun watching "her boys" that she managed to snap several excellent photos of the three "rail-fan" sons having a great time. In this regard, the 5 year old is a HUGE Percy fan (Thomas the Train). I understand that Mrs. Claus has spoken with Santa, asking him to bring me a Lionel Percy engine for Christmas. [I also have inside information that Mario's Trains is working directly with Santa to make this wish come true!]
Thanks for all of the helpful suggestions as they are really making for a great time with the boys, and, delighting their Mom in the process. I plan to implement more of the suggestions in the future, and have printed this entire thread for future reference.