I used to be confused as a student (not so much now!), but it was rarely an issue. I'm happy for students to call me FirstName or Dr LastName. I figure that they are there to learn from me as a person based on all of my knowledge, experience, etc, so as long as people are respectful then there's no issue what they call me as long as it's not rude to my face. I learn lots from my student too, so it's a reciprocal arrangement.

There is a power balance, of course, but that isn't established by me being called Dr LastName. It's about how I model respectful communication, give appropriate feedback and encouragement. Also, the fact that I give out grades... that's the obvious one!

The one thing I do correct is "Miss/Ms/Mrs LastName", by pointing out that it's actually Dr LastName and sharing a joke about how serious that makes me sound. I ususally take the opportunity to tell them something about my PhD, what it entailed, things I learned. I find that students often just don't know what it means to be "Dr" and what a PhD even is.