Consider each (non-binding) variable occurrence in turn. If the expression contains no binding occurrence with the same name as the variable occurrence under consideration, then this variable occurrence is clearly free.

If there is one or more binding occurrences with the same name as the variable occurrence under consideration, determine whether it belongs to the scope of one of these binding occurrences. If so, then the variable occurrence in question is bound. Otherwise, it is free.

If you are still not sure what the correct answer is, here is a complete and correct algorithm to determine whether or not a given variable occurrence is free in a given lambda expression:
1. Build a parse tree for the expression.
2. Find the leaf node in this tree that corresponds to the variable occurrence in question.
3. Starting from this leaf node, repeatedly go up along the edges of the tree until you reach a node for a lambda abstraction whose parameter has the same name as the variable in question.
4. If you find such a node, then the variable occurrence is bound; otherwise, it is free.