Fix ternary union for literals

mypy/checkexpr.py

@@ -5805,6 +5805,12 @@ def visit_conditional_expr(self, e: ConditionalExpr, allow_none_return: bool = F
                 context=if_type_fallback,
                 allow_none_return=allow_none_return,
             )
+
+        # In most cases using if_type as a context for right branch gives better inferred types.
+        # This is however not the case for literal types, so use the full context instead.
+        if is_literal_type_like(full_context_else_type) and not is_literal_type_like(else_type):
+            else_type = full_context_else_type
+
         res: Type = make_simplified_union([if_type, else_type])
         if has_uninhabited_component(res) and not isinstance(
             get_proper_type(self.type_context[-1]), UnionType

test-data/unit/check-literal.test

@@ -2960,3 +2960,27 @@ class C(B[Literal["word"]]):
 reveal_type(C().collection)  # N: Revealed type is "builtins.list[Literal['word']]"
 reveal_type(C().word)  # N: Revealed type is "Literal['word']"
 [builtins fixtures/tuple.pyi]
+
+[case testLiteralTernaryUnionNarrowing]
+from typing_extensions import Literal
+from typing import Optional
+
+SEP = Literal["a", "b"]
+
+class Base:
+    def feed_data(
+        self,
+        sep: SEP,
+    ) -> int:
+        return 0
+
+class C(Base):
+    def feed_data(
+        self,
+        sep: Optional[SEP] = None,
+    ) -> int:
+        if sep is None:
+            sep = "a" if int() else "b"
+            reveal_type(sep)  # N: Revealed type is "Union[Literal['a'], Literal['b']]"
+        return super().feed_data(sep)
+[builtins fixtures/tuple.pyi]