Boo hoo, the other 8 people had to hear the word "fucking idiot" once. How horrible. /s
All I know is that if someone approached me and called me a racist slur, they'd be damn sure that I'm going to call them out on it.
Anyways as someone who has been bullied in the past, here are 3 possible responses to bullying.
There's an aggressive response, such as screaming curses back at the bully, which is considered retaliation and is and definitely should be bannable. It's just fanning the fire, and it's usually the start of a long argument in chat that nobody wants to hear. This response is never appropriate and will usually just make the bully think it's even more fun to pick on you.
There's the assertive response which lets them know that you're not taking bullshit. It's usually a quick 1 liner, such as "this behavior is not okay" "stop acting like a moron" "you're being a fucking idiot" or "lol just fuck off bro". You don't engage the bully in an argument, you only tell them one thing, and then leave them alone. This response is the best if you have been being harassed over a long course of time and the harassment isn't stopping. Sometimes you might also use this method if you want to show the bully that you're not scared to stand up to them.
Then there's the passive response which is ignoring the bully, which seems to be what you guys are talking about. And sometimes this is a valid response too. Sometimes, not every conflict is worth giving a shit about.
I think both ignoring and making an assertive 1 liner are equally appropriate here in the OP's situation. But expecting someone to only ignore is an unfair expectation.