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Incidentally, the most important question (at least to me) has become:

  Why did you pick this idea to work on?  Do you have 
  domain expertise in this area?  How do you know 
  people need what you're making?
and that one shouldn't take long to answer, at least if you're on the right track.
I smiled when I saw this question. It's a question that heavily favors people starting a company in a field they work in and whose problems they're already intimately familiar with. While this might seem unfair to some, it's probably an extremely good indicator for investment quality.
You don't have to work in a field to be familiar with its problems. You can also be a user. But one way or another, you should understand the problems well.
I would agree with you on this one. I've never worked with news publishers before but we wanted to explore how the need for distribution affected news quality and what all we could do to extrapolate from there. Ended up spending a lot of time with a fairly large newspaper and iterating on ideas to finally arrive at personalisation as a solution. We got away with a product we could evolve, revenue and lots of insider information about how the publishing industry works. And, everyone knows everyone else, so they referred us to a ton of others too! :D
But magic happens if you are the user as well as have some expertise in that area. Or at least someone on team with similar expertise. Linux was a baby similar chemical reaction only.
I'm glad this is an important question but I always struggle with it.

1. I'm doing my startup for too many reasons to list.

2. Having multidisciplinary domain expertise doesn't allow for a concise answer.

3. At least the last part is easier since people that I've only met once keep checking in to ask when we'll launch.

1. Well what is the MOST important one of the reasons?

2. You should only list domain expertise that's relevant to your idea and that should be able to be explained fairly concisely.

3. Good job.

That one is easy and can easily be summed by quoting the wisdom of our savior Snoop "Doggy" Dog:

    I'm in it to win it and No Limit is my home.
(I secretly hope that RapGenius applied to YC with this. Woul've been the best application ever.)
I wonder if other people got confused with this question as well.

I understood it wrong initially - I thought the question was asking "how do you know this will be huge?" (as in "How do you tell whether there's a path out of an idea? How do you tell whether something is the germ of a giant company, or just a niche product? Often you can't" )

Then I realized that's not the question at all, it's just "how do you know people need what you are making?" Literally. I.e., the specific / niche-y thing that you are making first.

The copy is not my best work. But hope it gets the point across -- a quick application is good enough.
Another advice: do not apply two weeks before deadline (like me) because all posts with advices about YC applications are published in the last week.
You can always edit your application and resubmit until the application deadline
I'm not sure that there is any system in place to ensure that your edits are seen. So don't submit a bad application assuming that you can just edit it later. Make sure it's in a state such that you wouldn't be embarrassed if pg saw it.
Edits are seen as long as you resubmit after editing. There's even a warning on the application page if you have non-submited edits.
What about the video? I'm under the impression that while a good video won't get you into YC, a bad one can keep you out.
Yes, video is very helpful. But an application without video is much better than no application at all.
Better why? The best value for not accepted application is the time you spent on formulation ideas in your head and trying to make it simple/clear/interesting and of course worth money.
Given how short the video is, how bad can a bad one be?
We kinda like the requirement of no fancy post-production added; this reduces the possibility to screw it up. Besides, different people like different types of movies; but a good story always stands.
Thanks @gleb, I know I probably won't hear from YC, but you know the adage:

    "You miss 100% of the shots you don't take"
(comment deleted)
... pretty awesome...hihihihih