SQL Server 2008 on Hyper-V Virtual Machine with Multiple instances Running SQL Server 2008 instance on a Virtual Machine (Hyper-V) on a Windows 2008 R2 OS. Currently has a few production DBs. The whole VM itself is on RAID 5 volume (so are the DB files etc). 

We will be adding further development and production DBs onto this VM soon. The production DB's on average are 1.5Gig in size with the largest DB less than 20Gig.

My question is: would having multiple instances make much difference in my situation. i.e.
Data separation (dev, prod)
An instance fails the others still work (not sure if applicable in a shared disk situation)

Would multiple instances be worth the overhead? i.e. more services, memory used by services

Thanks.

PS. Our disk layout is on a single disk and I understand that is not the recommended but will leave as a separate issue as I want to nut down on the multiple instance question first.
For your hardware setup you should go with a single instance of SQL Server.  Configure resource governer to identify dev and prod logins and set limits accordingly.