So Quality 5 is the standard for MPC. Now my question is that you guys mention 6, 7 and 8 give you more headroom? What exactly do you mean by "headroom"? Thanks.

hi, welcome to the forum
1. headroom = a measureable unit representing the sizes of hats, to give enough room for your kind of head
2. headroom = the 'room' a codec got under certain settings to distribute it's bits to the whole song. if you encode with 320kbps, there should be enough 'headroom' for difficult parts of the song (depending on the song of course). if you choose to pick 96kbps, there's probb. no 'headroom' at all left.

this is still true for vbr-encoding, but in a much lesser degree than for e.g. cbr, as the codec already works in 'quality mode', but is still restricted a bit by his general aim (e.g. standard, insane, etc).

hope this helps.
note: this is only my personal understanding of the term headroom.

Headroom: The space between the top of your head, and the top of the ceiling or the top of the doorway.

Hence the term: "MAX HEADROOM: 2.3 METERS"

In audio, it means something else.
http://www.nathanspage.com/wftd/wftd_h.

while this is true for the loudness of songs, i guess it doesn't answer the original question...?

Headroom = reserve for killer samples. Say the psymodel fails in rare cases, the higher settings can soften or mask the artifact - but a lot of times a problem abxable on 5 is still present in the higher settings and you waste disk space. There is also more reserve for transcoding.