This serum, like others, will transform reality into strange places in your mind, to help decide which faction you are. This is before initiation, when children who are the age of 16 will decide which faction they will be for the rest of their lives. The serum helps them decide by having a process of elimination, to see which one they should choose.
“Faction Before Blood” is the belief that you choose your faction and stay true to your faction before your family.
In this simulation there’s a dog and a child. If you're Dauntless, you chase and jump, and use the knife to kill the dog. If you're Abnegation, then you protect the child from any harm. If you're Amity, you feed the cheese block to the dog trying to help diffuse the tension.
There’s also the train scene, in which the man says 'Do you know this person?' (and shows an image of the person). If you're Candor you tell the truth, that you do know this man. If you say “no”, then the man says that if you say yes it helps another person. The only people who say “yes” are the Abnegation.