Yes, the VPS are quite costly . So, when some people upgrade to Host1Plus, hosts gets money. The free VPS is like trial software, you can try it, if you like what it gives to you, you can upgrade to some bigger VPS. Many people upgrade to paid VPS, because free VPS is for small projects, like 1 gameserver and so on, but 128MB RAM and little CPU isn't enough for medium/large project! Sorry for my bad English, not my native one
Exactly. The biggest cost at the moment from giving away a free VPS are IPv4 addresses, as the last blocks has been allocated by ripe a long period of time ago.
The free VPS are the best way to create a game server for friends, like cs 1.6, samp, csgo, ts3 or other. Just for small projects, friends meeting and entertainment.
If you need something better, then you going to host1plus or to other paid host, so the free vps is going to next people which need it. Many peoples just upgrading their free VPS to h1p paid services, so the cost of their usage of free vps is just $0, with many profit for the ISP. Sorry for bad english