Microglia, the brain-resident macrophages, exhibit highly dynamic functions in neurodevelopment and neurodegeneration. Human microglia possess unique features as compared to mouse microglia, but our understanding of human microglial functions is largely limited by an inability to obtain human microglia under homeostatic states. Here, we develop a human pluripotent stem cell (hPSC)-based microglial chimeric mouse brain model by transplanting hPSC-derived primitive macrophage progenitors into neonatal mouse brains. Single-cell RNA-sequencing of the microglial chimeric mouse brains reveals that xenografted hPSC-derived microglia largely retain human microglial identity, as they exhibit signature gene expression patterns consistent with physiological human microglia and recapitulate heterogeneity of adult human microglia. Importantly, the engrafted hPSC-derived microglia exhibit dynamic response to cuprizone-induced demyelination and species-specific transcriptomic differences in the expression of neurological disease-risk genes in microglia. This model will serve as a tool to study the role of human microglia in brain development and degeneration.