Why does Mike Wazowski correct Randall's insult of 'cretin' to 'Cretan'?

It's probably a "snobs vs. slobs" joke.

Randall pronounces the word "cretin" using the accepted short e British pronunciation, one that is less common in the US, where the long e pronunciation is accepted and widely used.

This joke is probably a "snobs vs. slobs" joke. Americans who pronounce cretin with a short e tend to be more educated and perhaps wealthier. Pronouncing it "cree-tin" is how the "common man" says it. Correcting someone in America who says "cree-tin" would make a person come across as boorish and elitist. Correcting someone who pronounces it with the short e is essentially saying: "Quit putting on airs, around here everyone says creetin." In my opinion, the joke is a little misplaced, since social elitism and snobbery are not really among the character flaws marking Randall as a villain.

I don't believe this joke is referencing the residents of Crete at all.

There is one other possibility I can think of:

• Assume Randall meant cretin and pronounced it the British way.
• Assume Mike thinks Randall is referring to Cretans.

Mike is correcting Randall for mispronouncing the nationality, due to Mike not knowing the word cretin and Mike misunderstood the insult.

This joke is irony: Mike is uneducated and doesn't know the word cretin, thus proving he is foolish (like a cretin).

If my interpretation is correct, this joke matches the tenor of this later joke in the same scene:

Randall: "Say hello to the scream extractor"
Mike: "Hello"

Although, I must say that RuffDove's answer also matches the tenor of the later joke if we assume that the statements are more intentional by Mike.

The snobs vs slobs interpretation means: Mike trying to break Randall's intimidation/threat by telling him to act less elite.

The "Hello" response could be doing the same thing. Mike is putting down Randall by not being intimidated by the machine and instead making light of a situation by responding to a rhetorical command.

Actually, to call someone a Cretan (someone from the island of Crete) is an insult that is much older. “All Cretans are liars” is in Homer’s Odyssey And “Never trust a Creatan” is in the bible. So the ancient Mediterranean insult is much older. It’s not clear if it was later an inspiration for cretin or if they were later conflated, but most people who have read Homer know about the much older Cretan’s lie, which is also something that is a way of storytelling where a story is paradoxical, like in the statement “all Cretans are liars, is in fact a paradox because it is a Cretan saying it. As in a liar says “I am lying” so then the liar is telling the truth and lying about the fact that he is lying.
I wonder if there are other references to Greek mythology or Homer in the movie. I think this is a case of Mike showing off how smart he is. Another quote from the bible: "One of Crete's own prophets has said it: 'Cretans are always liars, evil brutes, lazy gluttons.' He has surely told the truth!" (Titus 1:12) It’s interesting because I think most people today say and spell it cretin but actually mean Cretan. The way I have heard it used in popular culture is not just someone dumb but actually someone who is a bully, brutish, dumb but also physically imposing, who lies about his intentions. That makes me think they actually meant Cretan and not just cretin.