Hi,
Thanks for the questions.
1. Yes, developers are allowed use any open source libraries/tools or any libraries/tools which the developer can claim ownership to.
2. Well, yes you can submit derivative work if you can come up with better and improved features or completely unique application with the basic idea.
generally speaking, it's highly encouraged to develop applications which can be used to enhance the lifestyle of people solve social problems we face but it's up to you to develop anything from a game to an enterprise application.
here are some resources for some ideas
http://www.rhok.org/problems (but please note that you are free to develop any kind of an application)
-Keshan