Acetylene detection plays an important role in fault diagnosis of power transformers. However, the available dissolved gas analysis (DGA) techniques have always relied on bulky instruments and are time-consuming. Herein, a high-performance acetylene sensor was fabricated on a microhotplate chip using In2O3 as the sensing material. To achieve high sensing response to acetylene, Pd-Ag core-shell nanoparticles were synthesized and used as catalysts. The transmission electron microscopy (TEM) image clearly shows that the Ag shell is deposited on one face of the cubic Pd nanoseeds. By loading the Pd-Ag bimetallic catalyst onto the surface of In2O3 sensing material, the acetylene sensor has been fabricated for acetylene detection. Due to the high catalytic performance of Pd-Ag bimetallic nanoparticles, the microhotplate sensor has a high response to acetylene gas, with a limit of detection (LOD) of 10 ppb. In addition to high sensitivity, the fabricated microhotplate sensor exhibits satisfactory selectivity, good repeatability, and fast response to acetylene. The high performance of the microhotplate sensor for acetylene gas indicates the application potential of trace acetylene detection in power transformer fault diagnosis.