Why do Caltech undergraduate students take classes with graduate students? Is that normal for other universities? It seems to put an unfair advantage on the graduate students.It is true that most, if not all, Caltech undergrads take some classes that are a mix of undergrads and PhD students. The reason for this is because we don't have enough undergraduates to justify undergrad-only courses at the advanced level -- we have about 950 undergrads across the entire Institute. It is also the case that we expect our undergrads to be able to handle graduate-level material.
As for whether this puts an unfair advantage to graduate students... if anything it's the other way around! PhD students by and large DO NOT CARE about grades. If the class is graded on a curve, that means the grading will favor the undergrads. If the class is an advanced topics paper-reading class designed to introduce PhD students to cutting edge research areas, then basically everyone gets an A/A- in the class anyways (because the grade is totally irrelevant for the purposes of the class).