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I had a couple of ideas for a game I did once. I suggest you preroll your NPC results:
Log cutting:
Players are given an option of two mw handaxes or a mw greataxe. In 10 rounds they have to see how many logs they can cut through. 2 Hardness 10hp logs with 5ac. Move action to place a new log. Winner is the one who cuts the most logs and gets their choice of the mw handaxe or greataxe
Drinking:
Players take a swig of alcohol DC 5 con check then have to walk across a weaving line which is fairly easy sober being a dc 5 acrobatics check to maintain balance then take another drink and walk back and continue. Each time you take a drink the DC of both goes up by 2. Failing the con check means you are either puking up your guts or passed out drunk and are eliminated. Failing the acrobatics check you step (or stagger as the case may be) over the line and are eliminated. Winner is the last one standing. Prize can be some nice alcohol
Card playing:
Basically a poker tournament. Winner takes all. Players have to make a bluff check and sense motive check plus a single extra d10 for luck. Person with the highest result wins. Prize would be money obviously
Archery competition:
It's in every medieval carnival/festival so you might as well put it in as well. Everyone uses the same bow (large and small provided) to hit a target. Give multiple AC's for various points on the target and that's where they hit. 5 arrows for the highest score. Prize can be a nice mw bow for the show of skill

Cevah |

Modern day fairs often have a section dedicated to assorted games of chance. All would work in a fantasy setting just fine. You can reskin things with descriptions involving cantrip level magic.
For prizes, cheap and flashy is good for most of the stuff, and better stuff requires multiple wins. Games always favor the house somehow. Either the prizes are cheap, the odds long or the house makes chance fall the way they want (i.e. cheating).
I think the masterwork tools (+50gp) and masterwork weapons (+300gp) are much too rich for 1st level. Wages for the common man is like 1sp/day, so 1gp is a rich prize for them, but as a 1st level adventurer, your starting money is much better. A coupon to dinner at a local inn would be a nice prize (surprise, it does not cover drinks). An evening with one of the exotic dancers is another item quite likely. Fancy ribbons for your character's girlfriend/wife is another prize. So are little pinwheels to give the kids.
/cevah

Subparhiggins |

Look in the Kingmaker AP book "War of the River Kings". There are plenty of rule based fair games in that book. Alternatively there are lots of gambling games to be found in Second Darkness AP book "Shadow in the Sky."
Some good prizes might be first level potions, or scrolls. Or some alchemical/adventuring items that could be useful that would otherwise be pricey but still within the means of fair-folk. Alchemical remedies, utility items, or even some enchanted ammunition in low quantities.
Don't overlook trophies, jewelry, or ornate worn items either that could make more a memorable bit of RP fluff. Like a fancy obnoxious wrestling style belt for a contest of strength.