Hi kunno. Many free hosting providers rely on their customers eventually upgrading to paid plans to obtain more features. Some may also rely on ads. As to whether they host free and paid customers on the same server, that really depends on the provider. I would suggest asking them directly.
Yes, upgrades are a way of earning for free hosts. In other cases, forced ads are put by your free web hosting providers and the advertisements revenue will go to your free web hosting service providers to cover your web hosting costs
You can definitely profit from web hosting because people need hosting and they are willing to pay for it. Free hosting never turns out to work out for companies and they will move on to a paid host. You have to find a way to stand out from the crowd and be the host that companies want to work with first.