Note change may not occur unless you choose "I don't think so" as the last dialog at the end of Long Way Home.
Bug!pcxbox360 (1.04) It should also be noted that if "Did you really?" is chosen after the initial diplomatic option, not only does it not reward you approval points, it prevents any friendship or rivalry point gains thereafter, for the rest of the game. Bug does not occur if you open with the humor option.
It may also happen even if you open with the humor option; should this happen, the only workaround is to skip the flirt option, which is fortunately not necessary to engage in a romance with Merrill.