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Personally, either may be correct, but visually the second broken up option is better. It better redirects the reader's mental view from William, to Elizabeth, then back to William. Breaking parag...
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#4: Attribution notice removed
Source: https://writers.stackexchange.com/a/34782 License name: CC BY-SA 3.0 License URL: https://creativecommons.org/licenses/by-sa/3.0/
#3: Attribution notice added
Source: https://writers.stackexchange.com/a/34782 License name: CC BY-SA 3.0 License URL: https://creativecommons.org/licenses/by-sa/3.0/
#2: Initial revision
Personally, either may be correct, but visually the second broken up option is better. It better redirects the reader's mental view from William, to Elizabeth, then back to William. Breaking paragraphs does this, and as an author it is your prerogative, a new paragraph is a signal to the reader to reset what they are looking at (in their imagination). Our natural inclination, in a conversation, is to look at the person we expect to speak next, or at the person that begins speaking. After William talks, it is better to break paragraph and look at Elizabeth to see her reaction (in speech or otherwise), how she received that information. After Elizabeth "answers" (with action or words or sound), we should break paragraph as we look back at William to see how he reacts. This is the nature of how we talk, people that watch the face of a speaker have far higher comprehension rates than when they can only hear the same speaker.