Yes, J.R.R. Tolkien's choice to use "dwarves" and not "dwarfs" throughout his writing is correct. He describes it as "a piece of personal bad grammar" resulting from ancient names and spellings for the fantasy creature. Since Tolkien's work does take place in a world of fantasy, it is a legitimate stylistic choice to use an unusual spelling, thought in the real world I think the proper spelling should be used.
Dwarves is the correct spelling now, because Tolkien's book made it part of the vernacular. His dwarves are also slightly differnt from traditional dwarfs. The word dwarves is also accepted by many dictionaries, and dwarfs is very rarely accepted by any dictionaries any more. It is the new acceptable word, because he changed it.
Well this one is definitely a matter of opinion and because it is, I will side with Tolkien's choice of dwarves for the plural of dwarf that is utilized for "Lord of the Rings". One could certainly combat that with "Snow White and the Seven Dwarfs" but I feel this is one of those cases where it is the writer's preference.
It may come as a great surprise to the fans of The Lord of the Rings, but the correct traditional spelling of the plural of “dwarf” is “dwarfs”, not “dwarves”. When an English noun ends with a single “f” in the singular, the “f” usually changes to “v” in the plural.