Just a word in support of "merry" as the translation. Richard Strauss's tone poem "Till Eulenspiegel's lustige Streiche" is always translated into English as "Merry Pranks". In addition, Shakespeare's play is translated into German as "Die Lustigen Weiber von Windsor", which title Otto Nicolai uses for his opera, so lustig(e) = merry has a long provenance.
No. St is pronounced that way when it's at the beginning of the word or its part (like in verstehen, technically it's not at the beginning, but ver- is a prefix), and possibly not even always. And -ig I think depends on the dialect, but probably the standard way to teach is that it's pronounced like ich.
Please read the tips and notes for this section ( https://www.duolingo.com/skill/de/Not/tips-and-notes ) -- especially the note at the end:
This skill contains both negative and positive statements.