Did dwarfs live together in villages?

Answer 1

Yes. Infact, Dwarves are incapable of living alone.

Alone, the cannot reach apples on trees - which is their main source of nutrition. In two's or three's, then climb on each others shoulders in order to reach those nice juicy apples that keep their hair long and healthy.

As earlier stated, this would be near impossible alone.

Furthermore, their villages are constantly under seige by pesky little Gnomes. If they did not have each other - they would be at a severe tactical disadvantage and would be enslaved by the Gnomes of Gnomeron.