In small saucepan, prepare medium white sauce by combining butter, flour, salt, and pepper. Bring ingredients to a bubble over low heat. Add milk. Cook quickly, stirring constantly, until mixture thickens and bubbles, approximately 3-4 minutes. Add cubed cheese and allow cheese to melt while stirring over low heat.

Put small amount of cheese sauce in bottom of 2-quart casserole dish. Drain potatoes. Layer potatoes, cheese sauce, potatoes, ending with cheese sauce. Sprinkle with paprika for garnish. Bake uncovered at 350 degrees for 45 minutes or until bubbly and brown on top.