How can we create a Facebook application on app engine ?
- Do you have any example?
- Do we need a business account for app engine to host Facebook application or will it work on free account ?
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Paid or not, it is related with capacity of your your application. There are several Quotas and Limits on App Engine. If your app stays in bounds, you do not need to pay to Google. But if you plan a widely used app, and if it will use large bandwidth, cpu power, disk, IO etc, then you may think about paying money.
Business is another issue, it gives you support and reliability, and central development management. You can see other details of business here
You can see this example also: HOWTO: Create a Facebook App with Google App Engine and Best Buy Remix.