The Kindness Bench for SimLit Writers - For All Games!

You would do it the way you show in your first example. Only start a new paragraph when the speaker changes, like this:

"As a general rule," she said, "only start a new paragraph in dialogue when you switch speakers."

"Like this?" he asked.

"Right!" she replied.

"But what about when the first speaker speaks in multiple paragraphs?" he asked.

"Well then," she said, "I guess you've got a real motormouth on your hands!"