MC regardless of what that general statement about metamagic feats says, the specific statement about merciful spell says:
Merciful Spell (Metamagic)
Your damaging spells subdue rather than kill.
Benefit: You can alter spells that inflict damage to inflict nonlethal damage instead. Spells that inflict damage of a particular type (such as fire) inflict nonlethal damage of that same type. A merciful spell does not use up a higher-level spell slot than the spell's actual level.
by your logic, any use of merciful spell as a metamagic feat would require one spell slot higher even though it says in the description that it uses the same spell slot.
also by your logic, magical lineage wouldnt affect any metamagic feats that only have a +1 level increase, because the net result would be that the level would stay the same.
regardless of what you think, it's very clear what Merciful Spell does, and what the magical lineage trait does. when you take the two together you are trading a feat, a trait, the ability to do lethal damage (also means you dont do damage to undead, so unless you fill a level 1 slot with regular magic missile you're back to normal cantrips, hope you got one that is useful at all) and in the case of classes that dont prepare spells additional casting time (loss of move action) for a pretty basic attack that scales with every other level that you can cast at any time.
at levels one and two, that means you can do 1d4+1 every round. congratualtions, you're an archer. at level three, wizards can cast admonishing ray at least twice a day, which means that if you do enough fighting to the point where you would have normally used all your level 1 and 2 spells, you may notice a slight boost in damage, but for a feat and a trait that's not outlandish. At level 5 you'll rarely use magic missile, and when you do you probably wont get anything from the fact that it's a lvl 0 spell. by level 7 admonishing ray can do 8d6 and between it and your third and fourth level spells, you probably wont be casting magic missile at all.
so for a feat and a trait you get some low level firepower. if i were rolling a wizard, i'd use the feat and trait for something that might actually help me past lvl 4 and do my 1d3 cantrips for a couple rounds each day.
the wording in merciful spell clearly prevents any heal spamming (must be used on a spell that deals damage), which is the only possible balance issue, and it even covers usage as a weapon against undead, because undead are immune to nonlethal damage.
all in all, the only use i can see is for characters that want to focus their spell buying on things that really arent helpful in combat, while maintaining some semblance of usefulness in combat.
