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I think the sheer randomness of the words was why they were cracking up. As for Mio laughing, I think that's basically showing that although Mio tries to act serious, she isn't that different from the other girls. It's basically her 'serious' facade breaking down; notice how during the scene where they're trying to fall asleep, Mio doesn't laugh, it's only later when Ritsu says Skull again that she cracks up.
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