This is the following new updated article_type function to make it work:
I have removed selected attribute from none option and added selected attribute to that terms having news slug.
// This function gets called in edit-form-advanced.php
function article_type($post) {
echo '<input type="hidden" name="taxonomy_noncename" id="taxonomy_noncename" value="' .
wp_create_nonce( 'taxonomy_type' ) . '" />';
// Get all type taxonomy terms
$types = get_terms('type', 'hide_empty=0');
?>
<select name="post_type" id='post_type'>
<!-- Display types as options -->
<?php
$names = wp_get_object_terms($post->ID, 'type');
?>
<option class="type-option" value="">None</option>
<?php
foreach ($types as $type) {
if (!is_wp_error($names) && !empty($names) && !strcmp($type->slug, $names[0]->slug))
echo "<option class="type-option" value="" . $type->slug . "" selected>" . $type->name . "</option>\n";
else if(!strcmp($type->slug, 'news'))
echo "<option class="type-option" value="" . $type->slug . "" selected>" . $type->name . "</option>\n";
else
echo "<option class="type-option" value="" . $type->slug . "">" . $type->name . "</option>\n";
}
?>
</select>
<?php
}