Learn Icelandic: Evrópa er heimsálfan þar sem við búum, er það ekki? - Europe is the continent where we live, isn't it?

No, and that is the best part about Icelandic question tags! In English, the tag changes based on the subject and verb (isn't it, aren't we, doesn't she, etc.). In Icelandic, er það ekki? (literally 'is it not?') is a fixed phrase. You can attach it to almost any statement to ask for confirmation, regardless of who or what the sentence is about.

Why does the sentence use þar sem for 'where' instead of the question word hvar?

The word hvar is strictly used for asking questions, like 'Where is Europe?' (Hvar er Evrópa?). When you are connecting clauses and referring back to a place to describe it (meaning 'in which' or 'at which'), you must use the relative conjunction þar sem.

How is the word heimsálfan (the continent) put together?

It is a compound noun made of heimur (world) and álfa (continent or region). The -s- in the middle is the genitive (possessive) ending of heimur, literally making it 'world's region'. Because álfa is a feminine noun, it takes the feminine definite article suffix -n at the very end, giving us heimsálfan (the continent).

Could I use the verb lifum instead of búum for 'live' here?