How do the children’s reactions to the bachelor’s story develop the passage’s humor?

The children find the bachelor's story exciting, and the bachelor also took the time to draw the children into the story by talking to them..... by giving them a kind of personal investment, as to what would come next.

“Was she pretty?” asked the older little girl.

“Not as pretty as any of you,” said the bachelor, “but she was horribly good.”

The children showed they liked this part of the story; the word horrible in connection with goodness was something new and they liked it.