His response was perfect.
If you've been around a kid for more than five minutes, you know they tend to see the world a little differently than grown-ups. They have a... unique perspective. Which is probably why Thor actor Chris Hemsworth was a little blindsided when his four year-old daughter told him "I want a penis daddy!", but his response was actually one of the sweetest things:
Way to be!
This is really the truest kind of love you can give your kids. Lift them up, celebrate who they are and who they're going to become. And accept that they're going to blindside you from time to time ;)