This exercise is to practice disarming another's attempt at degrading humor. It is essentially taking the other's joke and using it to make an even bigger, self-deprecating punchline to show that you are unaffected. This is a great way to make someone's jab backfire in your favor.
Example: Abraham Lincoln, after being called two-faced, said, "I leave it to my audience. If I had another face, do you think I would wear this one?"