Key West is running almost 100% capacity right now, which is unusual for this time of year but it's happening. $200 a night can be done, but you may have to look into a little more unconventional booking, like
http://www.vrbo.com or
http://www.airbnb.com I've stayed at condos in Truman Annex for about $1500 for a week. If you're not averse to a hostel, there is one in Key West that is reasonable. I've not stayed there, but friends who did said it was OK, by hostel standards.
http://www.keywesthostel.com/motel_rooms.html Their regular hotel rooms (I'm not sure of the quality) are about $135 a night, give or take, for mid-August. I've rented houses, cottages, B&B rooms, hotel rooms and condos. Each has had their own appeal and merits.
To really enjoy much of what Key West has to offer while still being within decent walking distance you'll want to stay in Old Town. Depending on what you want to do primarily you should choose either closer to Upper or Lower Duval. Upper is quieter. Lower is where more bars, restaurants, shops, museums, etc. are located.
I tend to avoid Duval like the plague, but if you must then you must. Of the places on Duval I like, there is:
Butterfly Conservatory -
http://www.keywestbutterfly.com/
San Carlos Institute -
http://www.institutosancarlos.org/
Island Style Gallery -
http://www.islandstylegalleries.com/
La Trattoria/Virgilio's -
http://latrattoria.us/
Croissants de France -
http://www.croissantsdefrance.com/
Whistle Bar, which is above The Bull. Sit out on the balcony with a drink and watch the craziness on Duval. Garden of Eden, the bar on the roof, is clothing optional. -
http://www.bullkeywest.com/
The Porch. Great craft beer, and even better when friends are working the bar. -
http://www.theporchkw.com/
Restaurants I tend to frequent:
Louie's Backyard. A Hangover Burger with a Red Stripe while sitting at the bar on the Afterdeck is my idea of Paradise. -
http://www.louiesbackyard.com/
Pepe's Cafe. Great breakfast. -
http://pepeskeywest.com/
The Cafe, A Mostly Vegetarian Place -
http://www.thecafekw.com/
Sarabeth's -
http://sarabethskeywest.com/
Kojin Noodle Bar -
http://www.tripadvisor.com/Restaura...Noodle_Bar-Key_West_Florida_Keys_Florida.html
Mr. Z's for late night drunk food, or when I need a slice or a cheesesteak. -
http://www.mrzskeywest.com/
Blue Heaven. So good Jimmy Buffett wrote a song about it. -
http://www.blueheavenkw.com/
Roof Top Cafe -
http://www.rooftopcafekeywest.com/
Turtle Kraals -
http://www.turtlekraals.com/
Duetto Pizza and Gelato -
http://pizzaandgelato.net/
El Siboney. The best Cuban food I've had in a restaurant. -
http://www.elsiboneyrestaurant.com/
Rum Barrel -
http://www.rumbarrel.com/
Garbo's Grill. Don't miss it. -
http://www.garbosgrillkw.com/
Bars I love on The Rock:
Schooner Wharf Bar. My favorite bar in the world, bar none. When Michael McCloud is playing and I have a frozen Rum Runner with a 151 floater in my hand I'm in heaven. It's right next to Jimmy Buffett's studio, Shrimpboat Sound, though unless you know what you're looking for you'll probably never find the studio. It's not unusual to see music stars at Schooner Wharf when they take a break from recording. Zac Brown, George Strait, Toby Keith and many others record there. -
http://www.schoonerwharf.com/
Smokin' Tuna Saloon -
http://smokintunasaloon.com/
Virgilio's - See the La Trattoria link above. Virgilio's is off of Duval, behind La Trattoria, on Applerouth.
The Chart Room. This is where Jimmy Buffett went with Jerry Jeff Walker once he got to the island. Popular hangout of Truman Capote, Tennessee Williams, Mel Fisher and many others. -
https://www.pierhouse.com/dining/chart-room-bar.aspx
The Porch
Louie's Afterdeck
Green Parrot. Get The Root Beer Shooter. This place is packed at night with locals. Great bands at times. One of my favorite dives in the world. Legendary. -
http://www.greenparrot.com/
Cork and Stogie -
https://www.corkandstogie.com/
If you're looking to do a sunset cruise, I've been on Fury (the quiet one, not the Commotion on the Ocean) and Schooner Hindu. I loved Schooner Hindu, but she's in P-Town for the summer. She usually returns to Key West in October. Fury was nice but not as intimate -
https://www.furycat.com/key-west/sunset-sailing-cruises.htm and
http://sailschoonerhindu.com/key-west-sailing/
Trip Advisor is a great place to find any other activities you want to do. I tend to eat, drink, visit friends, walk, bike, sit, write and read when I'm in Key West, so I've not done Jet Ski tours, snorkeling, etc.
This should keep you busy for a while.