Yes--the standard practice (at least among indies) is to have one file for the complete manuscript, with chapter headings. This way, your editor can do global search-and-replace operations, run macros on the complete MS at once, easily find something from an earlier point in the text (e.g., "Wait, I thought Susie's last name was Smith before, not Smythe...") without having to remember also which chapter it was in, and so on. And yes, MS Word is the industry standard for editing, in large part because of its Track Changes and commenting features and the ability to use macros to automate repetitive tasks--it's unlikely your editor would prefer to work on a PDF, though they are sometimes used for final proofing of print books.