How can I check whether a username is in use? On creating a "course" content, i am creating a dummy user as its "instructor". Here is the related question.

I wasn't able to add a condition to the rule that creates the user, that checks whether a user with that name already exists. If it does, then the action (create new user) will not fire. 

How can I do that?

I am using rules module with drupal 7.
You need add the condition for if the user exists or doesn't exist and then you are able to create two actions, depending on the user exists or not.

The problem is that this is not possible to do with Rules out of the box. It's not hard to add a condition like this, but it required custom code in a custom module. If this is not an option, what you are asking for is impossible AFAIK, as it doesn't exist.