Step 1: Notice the prism angle A is common to both cases.
For a thin prism, $\delta = (\mu_{\text{rel}}-1)A$. Since $A$ does not change when the prism is dipped in the liquid, we can skip solving for it and work directly with a ratio.
Step 2: Write the ratio of the two deviations. \[ \frac{\delta_2}{\delta_1} = \frac{\mu_{\text{rel},2}-1}{\mu_{\text{rel},1}-1} \] In air, $\mu_{\text{rel},1} = 1.5$. In the liquid, $\mu_{\text{rel},2} = \frac{1.5}{1.2} = 1.25$.
Step 3: Substitute and simplify. \[ \frac{\delta_2}{7^\circ} = \frac{1.25-1}{1.5-1} = \frac{0.25}{0.5} = 0.5 \]
Step 4: Solve for the new minimum deviation. \[ \delta_2 = 0.5 \times 7^\circ \] \[ \boxed{\delta_2 = 3.5^\circ} \]