How do people not understand this. Psiko has even provided the answer. I'm glad I didn't ask the puzzle that is more complex than this one!
Frankly, we're presuming there are only red and black hats on. We also presume the students know they only have a red or a black hat on. To presume otherwise is just picky
I didn't write it for reference, it was in a lecture I did, and figured it would amuse people.
The reason the theory works, is because you add an extra level of information with the 'at least one' piece of information. It is a demonstration in the difference between near perfect common knowledge, and perfect common knowledge.
kd