Allow bottom types as hk type arguments

Fixes problem raised in #966.

Author: odersky

src/dotty/tools/dotc/core/TypeApplications.scala

@@ -328,10 +328,14 @@ class TypeApplications(val self: Type) extends AnyVal {
       //.ensuring(res => res.EtaReduce =:= self, s"res = $res, core = ${res.EtaReduce}, self = $self, hc = ${res.hashCode}")
   }
 
-  /** Eta expand the prefix in front of any refinements. */
-  def EtaExpandCore(implicit ctx: Context): Type = self.stripTypeVar match {
+  /** Eta expand the prefix in front of any refinements.
+   *  @param  tparamsForBottom   Type parameters to use if core is a bottom type
+   */
+  def EtaExpandCore(tparamsForBottom: List[TypeSymbol])(implicit ctx: Context): Type = self.stripTypeVar match {
     case self: RefinedType =>
-      self.derivedRefinedType(self.parent.EtaExpandCore, self.refinedName, self.refinedInfo)
+      self.derivedRefinedType(self.parent.EtaExpandCore(tparamsForBottom), self.refinedName, self.refinedInfo)
+    case tp: TypeRef if defn.isBottomClass(tp.symbol) =>
+      self.LambdaAbstract(tparamsForBottom)
     case _ =>
       self.EtaExpand(self.typeParams)
   }

src/dotty/tools/dotc/core/Types.scala

@@ -1517,7 +1517,7 @@ object Types {
           // After substitution we might end up with a type like
           // `C { type hk$0 = T0; ...; type hk$n = Tn } # $Apply`
           // where C is a class. In that case we eta expand `C`.
-          derivedSelect(prefix.EtaExpandCore)
+          prefix.EtaExpandCore(this.prefix.typeConstructor.typeParams)
         }
         else newLikeThis(prefix)
       }

tests/pos/i966.scala

@@ -0,0 +1,4 @@
+object Test {
+  def foo[M[_]]: M[Int] = ???
+  val x = foo[Nothing]
+}