My assumption is that the cost of producing a digital copy is significantly less expensive than the paper version. (I'd appreciate any links to studies on this.) If it's true, then advertising should not be necessary to defray cost.

You don't pay the price you'd have to pay if it didn't have any advertisements either... In Montréal (at least) they even give some newspapers in the subway.

Note the huge increases in print newspaper circulation /sarcasm