how to solve this lambda expression with free variable/s
The term $\lambda x . x y$ is in normal form. It does not reduce any further.

In general, to find out these things, you can just type them into a $\lambda$-calculus calculator. One is available in my PL zoo (hmm, it is momentarily under construction):

lambda @ programming languages zoo
Type Ctrl-D to exit or "#help;" for help.
# #constant y ;
y is a constant.
# ^ x . x y ;
    = λ x . x y


The language wants you to declare free variables as constants, which is why we first explain that y is a known constant.