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If a computer is doing the grading 2 is no more difficult than 1 and 20K is no more difficult than 2.

The issue is that having the computer do the grading can be difficult for some subject matters. It is fine to present a set of simple questions that can be computer graded for a student to evaluate whether they got the concept and another to meaningfully evaluate the student's mastery when the subject matter is anything beyond mere facts and figures. E.g., in the self-instructional material I did in genetics, there were simple questions with the text material to test basic understanding (with alternate paths and the like), but to make any real test of problem solving mastery I had to develop a computer-simulated laboratory and that was non-trivial development. I'm not saying that it is impossible, but rather that it can be difficult and difficult translates into expensive as well as requiring imagination.

How do people make money on free open source software?

Mostly by providing paid support. That is often not money going to the people who wrote it and thus is not funding further development.
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