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Introduction
"They say there are certain Undead that smell especially bad. If those come near Katan... Just the thought of it makes me want to faint. I heard they are somewhere near the outside of the North Gate. Please, get rid of them before they come any closer. Please."
Walkthrough
After accepting the quest, head north out of Katan and follow the path that leads north. Keep following the path after it turns northeast until a small alcove in the rocks opens up on your left to the north of the path. The small field is actually part of the region Northeast of Katan. Kill the required number of Rat Goblins and then return to Merchant Lunerteon.
Conclusion
"Did you get rid of them? Can we go to sleep comfortably at night now? Great!"